A Review of the Literature on Productivity Impacts of Global Value Chains and Foreign Direct Investment: Towards an Integrated Approach

Information spillovers from multinational enterprises to local firms in developing countries are examined in the literature on global value chains (GVCs) and foreign direct investment (FDI). However, both GVC and FDI studies are carried out independently and separately. On the one hand, GVC studies explore an important mechanism underlying the productivity improvements of local firms but largely descriptive and conceptual, without rigorous quantitative analysis. On the other hand, FDI studies are quantitative, focusing on the impacts on the productivity of local enterprises in developing countries; however, their frequently used estimation functions have several restrictive assumptions. The present review of previous GVC and FDI studies shows that these two strands of the literature are concerned commonly with information spillovers, absorptive capacity of domestic enterprises, and backward linkages between foreign and domestic enterprises, even though their theoretical perspectives differ substantively. This literature review concludes that an integrated approach of incorporating the insightful perspective of GVC studies into the empirical approach of FDI studies will likely lead to more meaningful empirical findings that may reveal, in greater depth, the mechanisms underlying the productivity improvements of local enterprises in developing countries.