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n over 4000 Venezuelan firms, find productivity in domestic plants declines when foreign investment increases, thus seriously questioning the spillover theory. Similarly, Djanov and Hoekman (2000) not only find negative spillover effects of FDI on domestic plants in Czech industry, but also suggest that domestic firms may lack the ability to absorb the technologies introduced by foreign firms due to their low research and development activities. Along similar lines, Kinoshita (2001), using firm level panel data on Czech manufacturing firms between 1995 and 1998, concludes that technology spillovers from FDI occur for firms that are more R&D intensive.

It appears that FDI has a positive impact on TFP growth in industrialised countries, while such positive results are harder to observe in developing countries. It may of course be that, in the latter case, recipients are too weak in terms of their absorptive capacity. FDI is included as a conduit for the implementation of new technologies to capture the effect of knowledge. It is important to note that the measurement of knowledge constitutes a problem. It is usually proxied by R&D; however, R&D expenditures in Egypt do not exceed 2% of GNI on average through the period, which is a low figure that does not capture all expenditures related to improving production processes. Since MNEs are the main producers of R&D, we follow Smoolny 2000 and Borensztein et al 1998 in proxying the knowledge production factor by FDI inflows to the sectors.

Open economies (Openness) is now widely accepted to grow more rapidly than closed economies. Integration into the world economy provides firms with access to a larger market, a larger variety of goods and services and more advanced technologies, which can be adjusted for domestic uses. Moreover, exposure to international competition may bring about higher-quality products and alleviate duplication of R&D effort (Rivera-Batiz and Romer 1991; Grossman and Helpman 1994). The two important channels of openness are imports and exports.

With regard to imports, it can be argued that, in particular, capital goods imports may increase domestic productivity, since capital goods embody technological knowledge, and, hence, foreign R&D activities spillover from one country to another through international trade. The literature usually suggests two basic mechanisms for these trade- related R&D spillover effects (Grossman and Helpman 1995, and Rivera-Batiz and Romer 1991). First, the recipient countries can imitate the technology. If the cost of obtaining knowledge is less than the cost of the corresponding invention, then a knowledge spillover occurs. Second, if R&D expenditures by countries from abroad create new capital goods that are different or better than those that already exist, then the productivity of an importing country improves by employing a wider variety of capital inputs or by simply using better capital inputs in final production. Thus, capital goods imports enable a country to acquire technology developed worldwide.

Referring to exports, it can be argued that, first; an expansion in exports may promote specialization in sectors in which a country has comparative advantage, and lead to a reallocation of resources from the relatively inefficient non-trade sector to the more productive export sector. Second, exports growth can raise productivity by offering larger e