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Foreign entry and spillovers with technological incompatibilities in the supply chain

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  • Carluccio, Juan
  • Fally, Thibault

Abstract

Does foreign entry improve host country productivity and welfare? Previous studies have looked at the role of backward linkages with domestic suppliers and their effects on domestic competitors. In this paper, we study how these externalities are affected by technological incompatibilities between foreign and domestic technologies. When foreign technologies require specialized inputs, some local suppliers self-select into production for multinational firms. A decrease in the cost of inputs compatible with the foreign technology has heterogeneous effects. It benefits foreign firms and the most productive downstream domestic firms that adopt the foreign technology, and negatively affects firms using the domestic technology. Technological incompatibilities reduce the welfare gains from openness to FDI, but this negative effect can be overcome by domestic technology adoption. The model's predictions are consistent with the stylized facts drawn from the empirical literature on FDI spillovers.

Suggested Citation

  • Carluccio, Juan & Fally, Thibault, 2013. "Foreign entry and spillovers with technological incompatibilities in the supply chain," Journal of International Economics, Elsevier, vol. 90(1), pages 123-135.
  • Handle: RePEc:eee:inecon:v:90:y:2013:i:1:p:123-135 DOI: 10.1016/j.jinteco.2012.08.004
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    Cited by:

    1. repec:bla:reviec:v:25:y:2017:i:3:p:626-648 is not listed on IDEAS
    2. Huu Thanh Tam Nguyen & Ngoc-Sang Pham, 2014. "Should the host economy invest in a new industry? The roles of FDI spillovers, development level, and heterogeneity of firms," Documents de travail du Centre d'Economie de la Sorbonne 14086, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    3. Michele Imbruno & Rosanna Pittiglio & Filippo Reganati, 2015. "FDI, Intermediate Inputs and Firm Performance: Theory and Evidence from Italy," Discussion Papers 2015-15, University of Nottingham, GEP.
    4. Chrysovalantou Milliou, 2014. "Location for Foreign Direct Investment in Vertically Related Markets," Review of International Economics, Wiley Blackwell, vol. 22(2), pages 326-341, May.
    5. Laura Alfaro & Maggie X. Chen, 2012. "Selection and Market Reallocation: Productivity Gains from Multinational Production," NBER Working Papers 18207, National Bureau of Economic Research, Inc.
    6. Alireza Naghavi & Shin-Kun Peng & Yingyi Tsai, 2017. "Relationship-specific Investments and Intellectual Property Rights Enforcement with Heterogeneous Suppliers," Review of International Economics, Wiley Blackwell, pages 626-648.
    7. Hayato Kato & Toshihiro Okubo, 2017. "The Impact of a Natural Disaster on Foreign Direct Investment and Vertical Linkages," Keio-IES Discussion Paper Series 2017-018, Institute for Economics Studies, Keio University.
    8. Bin Ni, 2016. "Productivity Gap and Vertical Spillover: Evidence from Vietnam," Discussion Papers in Economics and Business 16-04, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    9. Javorcik, Beata & Lo Turco, Alessia & Maggioni, Daniela, 2017. "New and Improved: Does FDI Boost Production Complexity in Host Countries?," CEPR Discussion Papers 11942, C.E.P.R. Discussion Papers.
    10. Michele Imbruno, 2015. "Firm efficiency and Input market integration Trade versus FDI," FIW Working Paper series 154, FIW.
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    14. Chrysovalantou Milliou & Apostolis Pavlou, 2014. "Foreign Direct Investment Modes and Local Backward Linkages," CESifo Working Paper Series 4623, CESifo Group Munich.
    15. Katharina Eck & Stephan Huber, 2016. "Product sophistication and spillovers from foreign direct investment," Canadian Journal of Economics, Canadian Economics Association, vol. 49(4), pages 1658-1684, November.

    More about this item

    Keywords

    Foreign direct investment; Spillovers; Technological incompatibilities; Technology adoption; Firm heterogeneity;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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