The explanatory variables are the log of initial GDP per capita ( _yi_ ), net FDI inflows to country _i_ scaled by GDP ( _FDIi_ ), and a matrix of controls _Xi_ that includes credit to the private sector, educational attainment, inflation, trade openness, government consumption scaled by GDP, institutional quality, the black market premium, and a dummy for Sub-Saharan Africa.<sup>5</sup> All explanatory variables (with the exception of initial income) are averaged over the same 20-year period as the dependent variable.

Table 1 shows the coefficient estimates for different periods. It starts from 1970-1989 (Columns 1-3). This is the earliest period for which we have a sufficiently large sample of countries covering a full 20-year period. This is also the period used by Borensztein et al. (1998). In line with the well-known findings of Borensztein et al. (1998) and Alfaro et al. (2004), column 1 reports no significant correlation between FDI inflows and economic growth. We find the same result when we estimate the model over 1975-1994 (in column 4 of Table 1), which is the period studied by Alfaro et al. (2004).<sup>6</sup> Next, we follow Borensztein et al. (1998) and Alfaro et al. (2004) and augment our model with the interaction between FDI inflows and local conditions in the host economy. Formally, we estimate model where _LCi_ is a measure of local conditions proxied by either credit to the private sector over GDP as in Alfaro et al. (2010) or educational attainment as in Borensztein et al. (1998). We demean local conditions ( _LC_<sup>�</sup> _i_ = _LCi − LC_ ) so that _γ_ 2 measures the correlation between FDI and economic growth when local conditions are at their mean value (the main effect of these local conditions is included in matrix _Xi_ ). All other variables are defined as in Equation 1.

Columns 2-3 and 5-6 of Table 1 show that the relationship between FDI inflows and economic growth is stronger in countries with sufficiently high levels of education or sufficiently deep credit markets. Figure 1 illustrates this result by plotting the marginal effect of FDI on growth at different levels of financial depth (panels a and c) and education (panels b and d).

When we estimate the model using data for 1970-89, the direct link between FDI and growth is not statistically significant when we interact FDI with credit to the private sector over GDP (Column 2 of Table 1). This result indicates that there is no significant correlation between FDI and growth when financial depth is at its cross-country mean. However, the correlation between FDI and GDP growth becomes positive and statistically significant when financial depth is 25 percentage points above the cross-country mean (panel a of Figure 1). The point estimates imply that a one-standard deviation increase in FDI is associated with 1 percentage point increase in GDP growth when credit to the private sector is 25 percentage points above the sample mean. This is a large effect if one considers that average growth in the sample is 1.5%. The correlation

> 5These are the variables used in the baseline estimations of Borensztein et al. (1998) and Alfaro et al. (2004).

> 6The vintage of the World Development Indicators data that we use is different from that used in the papers that we replicate. The more recent vintages of the WDI contains updated FDI data. In these updated data some values are different from those used in earlier studies, even when they refer to the same country-year (we would like to thank Laura Alfaro for telling us about this). It is thus reassuring that the original results can be reproduced with the new vintage of the World Development Indicators.

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