Increasing globalization and interconnection among countries generates spatial and
temporal dependence which will affect the production process of each country. Many studies
have analyzed the effect of cross-sectional dependence by using restrictive parametric models.
We use a flexible nonparametric two-step approach on conditional efficiencies to eliminate the
dependence of production inputs/outputs on these common factors. By using a dataset of 44
countries over 1970-2007, we estimate the global frontier and explore the channels under which
Foreign Direct Investment (FDI) and time affect the production process and its components: im-
pact on the attainable production set (input-output space), and the impact on the distribution of
efficiencies. We extend existing methodological tools - flexible non parametric location-scale fron-
tier model - to examine these interrelationships. We emphasize the usefulness of “pre-whitened”
inputs/outputs to obtain more reliable measure of productivity and efficiency to better inves-
tigate the driven forces behind the catching-up productivity process. Furthermore, since the
influence of external factors has been eliminated, our proposed approach mitigates the prob-
lem of endogeneity bias caused by reverse causality between the external factors as FDI and
productivity.