Externalities from FDI on domestic firms’ Productivity: A Literature Review for Developed Countries

In this paper, we analyse the transmission mechanisms of externalities from FDI on the productivity of domestic firms, focusing on establishing the main linkages between them. Considering the complexity of the mechanisms involved, the analysis of the factors determining their effectiveness is far from being fully exploited. We expect to contribute to the existing literature by providing a broader picture of the determinant factors of externalities from FDI, through its classification, along the lines of the Theory of Heterogeneous Firms. This allows for a better understanding of the relevant variables to include in the empirical studies. Moreover, the transmission mechanisms of externalities from FDI are different according to the stage of development of the recipient countries. However, the existing literature reviews and meta-analysis include both Developed and Developing countries, hindering the learning process regarding the transmission mechanisms of externalities in the Developed Countries. We attempt to fill this gap by reviewing the empirical literature for five Western European countries and suggest some explanations for the mixed results.