Multinationals, technological incompatibilities and spillovers

Empirical studies provide evidence of positive spillovers from multinational firms to upstream suppliers coupled with negative spillovers to firms in the same industry. This paper shows that these empirical regularities can be rationalized in a model with incompatibilities between foreign and domestic technologies. When foreign technologies require specialized inputs, some local suppliers self-select into production for multinational firms. This "technological segmentation" in the upstream industry magnifies the productivity advantage of multinationals by restricting backward and forward linkages to groups of firms using the same technology. In this setting we study the role of heterogeneity among domestic firms. We show that only the best suppliers adopt the foreign technology and cater to multinationals. In the long run, technology adoption by the most productive downstream firms creates complementarities with multinationals that can offset the negative impact of segmentation.