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Foreign Investment and Domestic Productivity: Identifying Knowledge Spillovers and Competition Effects

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Listed:
  • Christian Fons-Rosen
  • Sebnem Kalemli-Ozcan
  • Bent E. Sørensen
  • Carolina Villegas-Sánchez
  • Vadym Volosovych

Abstract

We study the impact of foreign direct investment (FDI) on total factor productivity (TFP) of domestic firms using a new, representative firm-level data set spanning six countries. A novel finding is that firm-level spillovers from foreign firms to domestic companies can be significantly positive, non-existent, or even negative, depending on which sectors receive FDI. When foreign firms produce in the same narrow sector as domestic firms, the latter are negatively affected by increasing competition and positively affected by knowledge spillovers. We find that the positive spillovers dominate if foreign firms enter sectors where firms are “technologically close,” controlling for the endogeneity of their entry decision into such sectors. Positive technology spillovers also affect firms in other sectors, if those sectors are technologically close to the sectors receiving FDI. Increasing FDI in sectors that are technologically close to other sectors boosts TFP of domestic firms by twice as much as increasing FDI by the same amount across all sectors.

Suggested Citation

  • Christian Fons-Rosen & Sebnem Kalemli-Ozcan & Bent E. Sørensen & Carolina Villegas-Sánchez & Vadym Volosovych, 2017. "Foreign Investment and Domestic Productivity: Identifying Knowledge Spillovers and Competition Effects," Working Papers 986, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:986
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    References listed on IDEAS

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    Cited by:

    1. Escobar, Octavio & Mühlen, Henning, 2018. "The role of FDI in structural change: Evidence from Mexico," Hohenheim Discussion Papers in Business, Economics and Social Sciences 22-2018, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    2. Girum Abebe & Margaret S. McMillan & Michel Serafinelli, 2018. "Foreign Direct Investment and Knowledge Diffusion in Poor Locations: Evidence from Ethiopia," NBER Working Papers 24461, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    multinationals; competition; technology; selection; FDI; TFP;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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