IDEAS home Printed from
   My bibliography  Save this paper

Where are the Productivity Gains from Foreign Investment? Evidence on Spillovers and Reallocation from Firms, Industries and Countries


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


We identify the net effect of foreign direct investment (FDI) on the host economy by separating positive productivity (TFP) effects of knowledge spillovers from negative effects of competition. We allow for foreigners selecting into productive firms and sectors. Using a new and unique firm/establishment-level data set for a large set of countries during last decade with information on economic activity, ownership stake, type, sector, and country of origin of foreign investors, we show that the positive effect of FDI on the host economy's aggregate productivity is a myth. Foreigners invest in high productivity firms and sectors but do not increase productivity of the acquired firms and enhance productivity of the average domestic rm. For emerging markets, we find that the acquired firms increase their productivity but the effect is too small to generalize to the aggregate economy. A higher level of foreign investment in the same sector of operation leads to strong negative competition effects both in developed and in emerging markets. In developed countries, we find evidence of positive spillovers through knowledge transfers only for domestic firms with very high initial productivity levels operating within the same broad sector as the multinational investor but in a different sub-sector. Our results not only con firm the predictions of the new trade and FDI literature but also show the importance of double heterogeneity in productivity and foreign investment for the effect of FDI on economic growth.

Suggested Citation

  • Christian Fons-Rosen & Sebnem Kalemli-Ozcan & Bent E. Sørensen & Carolina Villegas-Sanchez & Vadym Volosovych, 2012. "Where are the Productivity Gains from Foreign Investment? Evidence on Spillovers and Reallocation from Firms, Industries and Countries," DEGIT Conference Papers c017_064, DEGIT, Dynamics, Economic Growth, and International Trade.
  • Handle: RePEc:deg:conpap:c017_064

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
    2. Matthias Arnold, Jens & Javorcik, Beata S., 2009. "Gifted kids or pushy parents? Foreign direct investment and plant productivity in Indonesia," Journal of International Economics, Elsevier, vol. 79(1), pages 42-53, September.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Multinationals; FDI; Knowledge Spillovers; Selection; Productivity;

    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


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:deg:conpap:c017_064. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Pedersen). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.