Does Foreign Direct Investment Increase the Productivity of Domestic Firms : In Search of Spillovers through Backward Linkages
Many countries compete against one another in attracting foreign investors by offering ever more generous incentive packages and justifying their actions with the productivity gains that are expected to accrue to domestic producers from knowledge e...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2002/10/2054540/foreign-direct-investment-increase-productivity-domestic-firms-search-spillovers-through-backward-linkages http://hdl.handle.net/10986/19210 |
| Summary: | Many countries compete against one
another in attracting foreign investors by offering ever
more generous incentive packages and justifying their
actions with the productivity gains that are expected to
accrue to domestic producers from knowledge externalities
generated by foreign affiliates. Despite this being hugely
important to public policy choices, there is little
conclusive evidence indicating that domestic firms benefit
from foreign presence in their sector. It is possible,
though, that researchers have been looking for foreign
direct investment (FDI) spillovers in the wrong place.
Multinationals have an incentive to prevent information
leakage that would enhance the performance of their local
competitors in the same industry but at the same time may
want to transfer knowledge to their local suppliers in other
sectors. Spillovers from FDI may be, therefore, more likely
to take place through backward linkages-that is, contacts
between domestic suppliers of intermediate inputs and their
multinational clients-and thus would not have been captured
by the earlier literature. This paper focuses on the
understudied issue of FDI spillovers through backward
linkages and goes beyond existing studies by shedding some
light on factors driving this phenomenon. It also improves
over existing literature by addressing several econometric
problems that may have biased the results of earlier
research. Based on a firm-level panel data set from
Lithuania, the estimation results are consistent with the
existence of productivity spillovers. They suggest that a 10
percent increase in the foreign presence in downstream
sectors is associated with 0.38 percent rise in output of
each domestic firm in the supplying industry. The data
indicate that these spillovers are not restricted
geographically, since local firms seem to benefit from the
operation of downstream foreign affiliates on their own, as
well as in other regions. The results further show that
greater productivity benefits are associated with
domestic-market, rather than export-oriented, foreign
affiliates. But no difference is detected between the
effects of fully-owned foreign firms and those with joint
domestic and foreign ownership. The findings of a positive
correlation between productivity growth of domestic firms
and the increase in multinational presence in downstream
sectors should not, however, be interpreted as a call for
subsidizing FDI. These results are consistent with the
existence of knowledge spillovers from foreign affiliates to
their local suppliers, but they may also be a result of
increased competition in upstream sectors. While the former
case would call for offering FDI incentive packages, it
would not be the optimal policy in the latter. Certainly
more research is needed to disentangle these two effects. |
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