Abstract

This paper estimates the contribution of Foreign Direct Investment (FDI) to the Total Factor Productivity (TFP) of Bulgaria for the period 2004-2013. As predicted by theory, a positive relationship between TFP and FDI is documented. The standard Ramsey (optimal) growth model, augmented through the FDI channel is used to compare the rate of convergence to an identical setup without FDI. Convergence simulations prove that ignoring the implications of this model leads to a distorted view of the growth path of the economy. The results of the study can serve as ­justification for developing governmental strategies to attract FDI inflows.