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Cross-sectional estimation of FDI spillovers when FDI is endogenous: OLS and IV estimates for Mexican manufacturing industries

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  • Jacob Jordaan

Abstract

Cross-sectional estimates of Foreign Direct Investment (FDI) spillovers are biased when the variable capturing the cross-industry variation of foreign participation is endogenous to the estimated regression model. In this article I introduce an original instrument for this problematic FDI variable, capturing the general FDI intensity of manufacturing industries. I use this instrument to estimate FDI externalities in a cross-section of Mexican manufacturing industries. The main findings show that, in contrast to the common criticism that Ordinary Least Squares (OLS) estimation produces an upward bias in the estimated FDI externality effect, for the sample of Mexican manufacturing industries OLS estimation causes a downward bias. Controlling for the tendency among foreign manufacturing firms to gravitate towards low productivity industries, the instrumental variable estimations provide robust evidence of significantly larger positive FDI spillover effects.

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  • Jacob Jordaan, 2011. "Cross-sectional estimation of FDI spillovers when FDI is endogenous: OLS and IV estimates for Mexican manufacturing industries," Applied Economics, Taylor & Francis Journals, vol. 43(19), pages 2451-2463.
    • Handle: RePEc:taf:applec:v:43:y:2011:i:19:p:2451-2463
    DOI: 10.1080/00036840903262977
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    References listed on IDEAS

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    1. Jozef Konings, 2000. "The Effects of Foreign Direct Investment on Domestic Firms: Evidence from Firm Level Panel Data in Emerging Economies," William Davidson Institute Working Papers Series 344, William Davidson Institute at the University of Michigan.
    2. Jozef Konings, 1999. "The Effect of Direct Foreign Investment on Domestic Firms: Evidence from Firm Level Panel Data in Emerging Economies," LICOS Discussion Papers 8699, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    3. Gordon H. HANSON, 2001. "Should Countries Promote Foreign Direct Investment?," G-24 Discussion Papers 9, United Nations Conference on Trade and Development.
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    1. Monastiriotis, Vassilis, 2014. "Origin of FDI and domestic productivity spillovers: does European FDI have a 'productivity advantage' in the ENP countries?," LSE Research Online Documents on Economics 55267, London School of Economics and Political Science, LSE Library.
    2. Binyam A. Demena & Peter A. G. van Bergeijk, 2017. "A Meta-Analysis Of Fdi And Productivity Spillovers In Developing Countries," Journal of Economic Surveys, Wiley Blackwell, vol. 31(2), pages 546-571, April.
    3. Jordaan, Jacob A., 2011. "FDI, Local Sourcing, and Supportive Linkages with Domestic Suppliers: The Case of Monterrey, Mexico," World Development, Elsevier, vol. 39(4), pages 620-632, April.
    4. Farole, Thomas & Winkler, Deborah, 2012. "Foreign firm characteristics, absorptive capacity and the institutional framework : the role of mediating factors for FDI spillovers in low- and middle-income countries," Policy Research Working Paper Series 6265, The World Bank.
    5. Egle Vaznyte & Petra Andries & Sarah Demeulemeester, 2021. "“Don’t leave me this way!” Drivers of parental hostility and employee spin-offs’ performance," Small Business Economics, Springer, vol. 57(1), pages 265-293, June.
    6. Dea Tusha & Jacob A. Jordaan, 2021. "Biased FDI spillovers in incomplete datasets: An empirical examination," Review of Development Economics, Wiley Blackwell, vol. 25(2), pages 582-600, May.
    7. Engidaw Sisay Negash & Wenjie Zhu & Yangyang Lu & Zhikai Wang, 2020. "Does Chinese Inward Foreign Direct Investment Improve the Productivity of Domestic Firms? Horizontal Linkages and Absorptive Capacities: Firm-Level Evidence from Ethiopia," Sustainability, MDPI, vol. 12(7), pages 1-23, April.
    8. Bykova, Anna & Jardon, Carlos M., 2017. "Lean against the wind: The moderation effect of foreign investments during the economic recession in Russia," Journal of Economics and Business, Elsevier, vol. 93(C), pages 1-14.

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