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Foreign entry and spillovers with technological incompatibilities in the supply chain

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  • Carluccio, Juan
  • Fally, Thibault

Abstract

Does foreign entry improve host country productivity and welfare? Previous studies have looked at the role of backward linkages with domestic suppliers and their effects on domestic competitors. In this paper, we study how these externalities are affected by technological incompatibilities between foreign and domestic technologies. When foreign technologies require specialized inputs, some local suppliers self-select into production for multinational firms. A decrease in the cost of inputs compatible with the foreign technology has heterogeneous effects. It benefits foreign firms and the most productive downstream domestic firms that adopt the foreign technology, and negatively affects firms using the domestic technology. Technological incompatibilities reduce the welfare gains from openness to FDI, but this negative effect can be overcome by domestic technology adoption. The model's predictions are consistent with the stylized facts drawn from the empirical literature on FDI spillovers.

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Bibliographic Info

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

Volume (Year): 90 (2013)
Issue (Month): 1 ()
Pages: 123-135

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Handle: RePEc:eee:inecon:v:90:y:2013:i:1:p:123-135

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

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Keywords: Foreign direct investment; Spillovers; Technological incompatibilities; Technology adoption; Firm heterogeneity;

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Cited by:
  1. Chrysovalantou Milliou & Apostolis Pavlou, 2014. "Foreign Direct Investment Modes and Local Backward Linkages," CESifo Working Paper Series 4623, CESifo Group Munich.
  2. Laura Alfaro & Maggie X. Chen, 2012. "Market Reallocation and Knowledge Spillover: The Gains from Multinational Production," Harvard Business School Working Papers 12-111, Harvard Business School, revised Jun 2013.
  3. Chrysovalantou Milliou, 2013. "Location of Foreign Direct Investment in Vertically Related Markets," CESifo Working Paper Series 4117, CESifo Group Munich.
  4. Laura Alfaro & Maggie X. Chen, 2012. "Selection, Reallocation, and Spillover: Identifying the Sources of Gains from Multinational Production," NBER Working Papers 18207, National Bureau of Economic Research, Inc.

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