Supply Chain Fragmentation and Spillovers from Foreign Direct Investment

The literature on FDI spillovers to domestic firm productivity increasingly points to supply chain linkages with multinational firms as the main channel for positive effects. To determine local and multinational firms' relative position in the supply chain, the literature relies on input-output tables. For a panel of Romanian firms we show that the level of industry aggregation in these tables and the commonly applied definitions for vertical spillovers bear an important impact on results. The use of aggregated input-output tables gives rise to significant and large horizontal spillover effects, whereas backward spillovers tend to be small and only marginally significant. Using detailed input-output tables, backward spillovers become highly significant and dominate horizontal spillover effects whose impact is considerably reduced. Assuming that the true nature of the backward spillover is to be found in a supplier-customer relationship, we show that -for the detailed IO-tables- including within-industry intermediate supply (excluded in the commonly used definition) results in a larger impact of the backward spillover, whereas the horizontal spillovers disappear.