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Foreign Direct Investment and Knowledge Diffusion in Poor Locations

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  • Abebe, Girum

    (Policy Studies Institute)

  • McMillan, Margaret

    (Tufts University)

  • Serafinelli, Michel

    (University of Essex)

Abstract

We use a plant level survey to identify interactions between domestic plants and foreign direct investment (FDI) in Ethiopia's manufacturing sector. One third of Ethiopian plants are linked to FDI through labor sharing, supply chains and competition. Technology upgrading most commonly occurs as a result of competition in output markets and observation and imitation of FDI in the same line of business. Other benefits include enhanced managerial practices and knowledge about exporting. Spillovers from FDI are identified by comparing changes in total factor productivity (TFP) among domestic plants in districts where a large greenfield foreign plant produces and districts where FDI in the same industry and around the same time was licensed but not yet operational. Over the four years starting with the year of the FDI opening, the TFP of domestic plants is 11 percent higher in treated districts, employment in domestic plants increases and more domestic plants open.

Suggested Citation

  • Abebe, Girum & McMillan, Margaret & Serafinelli, Michel, 2020. "Foreign Direct Investment and Knowledge Diffusion in Poor Locations," IZA Discussion Papers 13422, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp13422
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    Cited by:

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    2. Girum Abebe & Tigabu Degu & Gebrehiwot Ageba, 2018. "What drives productivity change in the manufacturing sector? Evidence from the metalworking industry in Ethiopia," Working Papers 020, Ethiopian Development Research Institute.
    3. Jonas Hjort & Vinayak Iyer & Golvine De Rochambeau, 2020. "Informational Barriers to Market Access: Experimental Evidence from Liberian Firms," Sciences Po publications 2020-09, Sciences Po.
    4. Matteo Fiorini & Marco Sanfilippo, 2019. "Roads and jobs in Ethiopia," WIDER Working Paper Series wp-2019-116, World Institute for Development Economic Research (UNU-WIDER).
    5. Crescenzi, Riccardo & Limodio, Nicola, 2021. "The impact of Chinese FDI in Africa: evidence from Ethiopia," LSE Research Online Documents on Economics 108455, London School of Economics and Political Science, LSE Library.
    6. Alan Gelb & Vijaya Ramachandran & Christian J. Meyer & Divyanshi Wadhwa & Kyle Navis, 2020. "Can Sub-Saharan Africa Be a Manufacturing Destination? Labor Costs, Price Levels, and the Role of Industrial Policy," Journal of Industry, Competition and Trade, Springer, vol. 20(2), pages 335-357, June.
    7. Song, Young Chul & Son, Sung Hyun, 2020. "Identifying the impact of geographical proximity on spillover effect of FDI: The evidence from Indian local firms’ performance gains," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).

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    More about this item

    Keywords

    productivity and technology; local economic development; Foreign Direct Investment;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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