This dissertation comprises three different studies that investigate the impact of ForeignDirect Investment (FDI) on separate macroeconomic issues. The first paper examines theeffect of FDI on Total Factor Productivity growth. Although the role of FDI in facilitatingtechnology transfer is well-known in the literature, empirical evidence regarding the effectof FDI on growth is mixed. Contradictory results in the literature may be due to the failureof accounting for endogeneity and the absorptive capacity of the hosting countries. Usingpanel data for 49 countries over the 1974-2008 time period, and the existence ofinvestment promotion agencies in the receiving countries as an instrument, the resultsshow that FDI leads to higher productivity growth. The results also indicate a significantpositive effect on the interaction between FDI and distance to the technological frontier,suggesting that the ability of technologically backward countries in absorbing technologiesdeveloped at the frontiers increases as more FDI stock accumulates.The second paper deals with capital flows and export diversification. Casualinspection of available evidence suggests that the magnitude of FDI is correlated with theextent of export diversification. Yet, little is known about the nature of this link. To bridgethis gap in the literature, I propose an inframarginal 2*2*2 Heckscher-Ohlin model oftrade that allows capital mobility and technological differences across countries. Themodel shows that trade costs determine the equilibrium trade structures. When trade costsare too high, autarky emerges as general equilibrium. However, an initial reduction intrade costs triggers trade in commodities based on comparative advantage. Further declinein transaction costs leads to the movement of capital (inward FDI) to the capital scarcecountry, enabling it to export a greater variety of goods under certain conditions.Finally, the third paper empirically studies the causal effect of FDI on exportdiversification. The existing literature, which is still at infancy, has not dealt with theproblems of endogeneity and aggregation bias in estimating the effects of FDI on exportdiversification. In this paper, I provide more robust evidence with 2SLS regression using anovel instrument for FDI as well as a highly disaggregated measure of exportdiversification with U.S. imports data (at the 10-digit level of Harmonized Systemclassification). Overall results confirm the export diversifying effect of FDI. However,further tests reveal that FDI only acts as a catalyst of export diversification in developingcountries, while advanced countries do not show an increase in the variety of exports dueto multinationals.