Foreign Direct Investment And Productivity Spillovers In The Irish Manufacturing Industry: Evidence From Firm Level Panel Data

This paper examines possible productivity spillovers from foreign-owned firms to indigenous firms in the manufacturing sector in Ireland, using a firm-level panel of all firms in the Irish manufacturing sector over the period 1991-1998. The approach commonly applied in the literature to examine such spillovers is to establish whether the presence of foreign firms in a sector boosts the productivity of indigenous plants in that sector. The measure of foreign presence used is the share of total employment in a sector accounted for by foreign firms in that sector. Using this approach, our results do not find any significant spillovers from foreign to domestic firms in Irish manufacturing industry. This result is independent of whether the relationship is estimated in levels or rates of change, and whether high or low levels of sectoral aggregation are used in measuring foreign presence. Following Castellani and Zanfei (2002), who show that the measurement of foreign presence as a share causes a downward bias in estimation results, we re-estimate the relationship using the absolute level of employment accounted for by foreign firms as our foreign presence variable. Applying this approach, we find some evidence of a positive and significant relationship between the level of labour productivity in domestic firms and foreign presence in the relevant Irish manufacturing sector. These results are sensitive to the levels of sectoral aggregation specified.