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Does trade participation limit domestic firms’ productivity gains from inward foreign direct investment?

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  • Rene Belderbos
  • Vincent Van Roy
  • Leo Sleuwaegen

Abstract

We examine to what extent domestic firms reap differential productivity gains from the presence of manufacturing affiliates of multinational firms in the home country (FDI spillovers), in the context of simultaneous participation in international trade through exporting and importing. FDI spillovers can occur within the industry (horizontal) and across industries due to client (forward) or supplier (backward) linkages of multinational firms, but the mechanisms underlying spillover effects may be attenuated if local firms are less reliant on inputs, clients, and competition in the domestic market. Fixed effects panel analyses on a sample of 4594 domestic Belgian firms during 2000-2007 reveal positive effects from horizontal, backward, and forward FDI spillovers on the productivity levels of domestic firms, as long as these firms do not engage in international trade. Horizontal spillovers from FDI are weaker for firms engaging in trade, while forward FDI spillovers do not benefit importing firms. Two-way traders benefit least from FDI spillovers. Forward and backward spillovers, are enhanced by human capital levels in local firms, while horizontal spillovers are reduced. The findings are broadly consistent with the notion that trade engagement and inward FDI can be substitutes in their effects on domestic firms’ productivity.

Suggested Citation

  • Rene Belderbos & Vincent Van Roy & Leo Sleuwaegen, 2020. "Does trade participation limit domestic firms’ productivity gains from inward foreign direct investment?," Working Papers of Department of Management, Strategy and Innovation, Leuven 661062, KU Leuven, Faculty of Economics and Business (FEB), Department of Management, Strategy and Innovation, Leuven.
    • Handle: RePEc:ete:msiper:661062
    Note: paper number MSI_2011
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    2. Ryota Nakatani, 2024. "Multifactor productivity growth enhancers across industries and countries: firm-level evidence," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 14(2), pages 401-446, June.
    3. Ronald Ebenezer Essel, 2023. "Foreign direct investment, technological spillover, and total factor productivity growth in Ghana," SN Business & Economics, Springer, vol. 3(8), pages 1-34, August.
    4. Julien Hanoteau, 2023. "Do foreign MNEs alleviate multidimensional poverty in developing countries?," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 13(4), pages 719-749, December.
    5. Jacint Balaguer & Ana Cuadros & Jose García-Quevedo, 2023. "Does foreign ownership promote environmental protection? Evidence from firm-level data," Small Business Economics, Springer, vol. 60(1), pages 227-244, January.

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