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Foreign Direct Investment and Spillovers through Backward Linkages

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  • Matouschek, Niko
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    Abstract

    Foreign direct investment projects can generate spillovers through backward linkages in the host economy. This will be the case if local competitors in the project's own industry can benefit from the upstream efficiency improvements that were induced by the foreign firm. We provide microfoundations for this spillover effect and argue that its creation depends crucially on the supplier arrangement that is chosen by the MNC. We use an incomplete contract framework to study the optimal supplier arrangement. The MNC will produce the inputs itself if the supplier's investment is neither too human capital nor too asset specific. The MNC will use several independent suppliers if its own investment is not too supplier specific, competition between suppliers is neither too strong nor too weak and competition in the project's own industry is not too strong. Finally, the MNC will use only one independent supplier if its own investment is very supplier specific, competition between suppliers is either very strong or very weak and the supplier's investment is either very human capital or asset specific. The foreign investment only generates spillovers to the local industry if the MNC uses several independent suppliers.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2283.

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    Date of creation: Nov 1999
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    Handle: RePEc:cpr:ceprdp:2283

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    Related research

    Keywords: Foreign Direct Investment; Property Rights; Vertical Integration;

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    References

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    1. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, vol. 43(2), pages 335-356, February.
    2. Blomström, Magnus & Kokko, Ari, 1996. "Multinational Corporations and Spillovers," Working Paper Series in Economics and Finance 99, Stockholm School of Economics.
    3. Rodriguez-Clare, Andres, 1996. "Multinationals, Linkages, and Economic Development," American Economic Review, American Economic Association, vol. 86(4), pages 852-73, September.
    4. Patrick Bolton & Chenggang Xu, 1998. "Ownership and Managerial competition: Employee, Customer, or Outside Ownership," William Davidson Institute Working Papers Series 174, William Davidson Institute at the University of Michigan.
    5. Bolton, Patrick & Whinston, Michael D, 1993. "Incomplete Contracts, Vertical Integration, and Supply Assurance," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(1), pages 121-48, January.
    6. Georg Noeldeke & Klaus Schmidt, 1998. "Sequential Investments and Options to Own," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 633-653, Winter.
    7. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(4), pages 691-719, August.
    8. Niko Matouschek & Anthony J. Venables, 2005. "Evaluating investment projects in the presence of sectoral linkages -super-1," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 13(4), pages 573-603, October.
    9. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
    10. Holmstrom, Bengt & Tirole, Jean, 1991. "Transfer Pricing and Organizational Form," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 7(2), pages 201-28, Fall.
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    12. Raghuram G. Rajan & Luigi Zingales, . "Power in a Theory of the Firm," CRSP working papers 335, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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    Cited by:
    1. Crespo, Nuno & Fontoura, Maria Paula, 2007. "Determinant Factors of FDI Spillovers - What Do We Really Know?," World Development, Elsevier, vol. 35(3), pages 410-425, March.
    2. Henrik Braconier & Pehr-Johan Norback & Dieter Urban, 2002. "Vertical FDI Reviseted," Development Working Papers 167, Centro Studi Luca d\'Agliano, University of Milano.
    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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