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Foreign Direct Investment and Knowledge Diffusion in Poor Locations: Evidence from Ethiopia

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  • Girum Abebe
  • Margaret S. McMillan
  • Michel Serafinelli

Abstract

We quantify foreign direct investment (FDI) spillovers by comparing changes in total factor productivity (TFP) among domestic plants in districts that attracted a large greenfield foreign plant and districts where greenfield FDI was licensed but not yet operational. Treated and untreated districts have similar trends in TFP prior to the opening of the large greenfield foreign plant. Over the four years starting with the year of the opening, TFP of domestic plants is 8% higher in treated districts. Using an alternative identification strategy that exploits the assignment of land for FDI by the Ethiopian Government, we obtain similar results. Foreign plants also attract new economic activity to treated districts. Exposure to foreign firms enhances domestic firms’: (i) production processes; (ii) managerial and organizational practices; (iii) logistics and; (iv) knowledge about exporting. Knowledge transfer is more likely among labor or vertically linked firms but also occurs outside these channels.

Suggested Citation

  • Girum Abebe & Margaret S. McMillan & Michel Serafinelli, 2018. "Foreign Direct Investment and Knowledge Diffusion in Poor Locations: Evidence from Ethiopia," NBER Working Papers 24461, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24461
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    Cited by:

    1. Jonas Hjort & Jonas Poulsen, 2019. "The Arrival of Fast Internet and Employment in Africa," American Economic Review, American Economic Association, vol. 109(3), pages 1032-1079, March.
    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. 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.
    4. 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).

    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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