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Welfare gains from Foreign Direct Investment through technology transfer to local suppliers

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  • Blalock, Garrick
  • Gertler, Paul J.

Abstract

We hypothesize that multinational firms operating in emerging markets transfer technology to local suppliers to increase their productivity and to lower input prices. To avoid hold-up by any single supplier, the foreign firm must make the technology widely available. This technology diffusion induces entry and more competition which lowers prices in the supply market. As a result, not just the foreign-owned firm, but all firms downstream of that supply market obtain lower prices. We test this hypothesis using a panel dataset of Indonesian manufacturing establishments. We find strong evidence of productivity gains, greater competition, and lower prices among local firms in markets that supply foreign entrants. The technology transfer is Pareto improving -- output and profits increase for firms in both the supplier and buyer sectors. Further, the technology transfer generates an externality that benefits buyers in other sectors downstream from the supply sector as well. This externality may provide a justification for policy intervention to encourage foreign investment.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 74 (2008)
Issue (Month): 2 (March)
Pages: 402-421

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Handle: RePEc:eee:inecon:v:74:y:2008:i:2:p:402-421

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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  12. Kokko, Ari, 1994. "Technology, market characteristics, and spillovers," Journal of Development Economics, Elsevier, vol. 43(2), pages 279-293, April.
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  14. Haddad, Mona & Harrison, Ann, 1993. "Are there positive spillovers from direct foreign investment? : Evidence from panel data for Morocco," Journal of Development Economics, Elsevier, vol. 42(1), pages 51-74, October.
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