The diffusion of externalities from foreign direct investment: theory ahead of measurement
AbstractIn this paper a structural estimation framework is developed to assess whether inward foreign direct investment (FDI) generates technological externalities. The econometric model is implemented in an empirical investigation with data from Colombiaâ€™s Manufacturing Census. So far, evidence of new technological opportunities for host-country firms arising from the operations of multinational corporations (MNCs) has been rather scarce. This is due to serious limitations in the way in which spillovers have been measured. In particular, empirical research has focused almost exclusively on intra-industry externalities while no allowance has been made for inter-industry technological externalities. But, in theory, the optimal location and organizational strategies by a MNC are chosen to minimize the risk of losing profits due to the leakage of technical information to potential competitors. Therefore, the host-country firms within the MNC subsidiaryâ€™s sector will tend to experience limited technological gains ensuing FDI, whereas producers in other sectors may benefit, especially if the MNC outsources to local upstream suppliers. While FDI may substitute investment by domestic plants within the MNC subsidiaryâ€™s sector, it can complement investment in other sectors. Hence, spillovers from FDI should be primarily inter-industry and not intra-industry. This conjecture is corroborated by testing of the mutisectoral model of FDI spillover diffusion on Colombian manufacturing data. Furthermore, both generic knowhow spillovers and linkage externalities are sizable Keywords; generic technology, inter-industry spillovers, absorptive capacity JEL codes: F21, F23, F43, O41, O34
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Bibliographic InfoPaper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 0023.
Date of creation: 01 Jan 2000
Date of revision:
Find related papers by JEL classification:
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
- O34 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Intellectual Property Rights
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