FDI, Forward Linkages and Services Inputs

This paper provides evidence of spillover effects from foreign direct investment (FDI) through forward linkages, a relatively neglected channel to enhance national competitiveness that is likely to become more important as countries seek to bolster domestic competitiveness and resilience to geo-economic shocks. Using granular information on the universe of firm-to-firm transactions and inward FDI in Rwanda, we find substantial and persistent effects on value-added, employment, and productivity of domestic firms after beginning to source from foreign-owned enterprises. These effects are more pervasive than those associated with selling to foreign-owned firms – the backward linkages emphasised in the literature. Suggestive evidence reveals that foreign-owned firms provide higher-quality intermediate inputs than domestic suppliers, particularly in specialized business and professional services that are difficult to import, and that these inputs complement rather than crowd out domestically sourced inputs.