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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? Existing studies have focused on the role of technology spillovers and backward linkages with domestic suppliers. 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 adopting the foreign technology, and negatively affects firms using the domestic technology. The impact on welfare is positive when we allow for endogenous entry in both upstream and downstream industries, but welfare gains can be negatively related to observed foreign presence at equilibrium. Our model can also reproduce various stylized facts drawn from the empirical literature on vertical and horizontal FDI spillovers.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7866.

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Date of creation: Jun 2010
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Handle: RePEc:cpr:ceprdp:7866

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Keywords: host country welfare; multinational firms; pecuniary externalities; technological incompatibilities;

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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. Chrysovalantou Milliou, 2013. "Location of Foreign Direct Investment in Vertically Related Markets," CESifo Working Paper Series 4117, CESifo Group Munich.
  3. 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.
  4. 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.

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