Does FDI benefit incumbent SMEs?: FDI spillovers and competition effects at the local level

That global networks provide positive externalities to participating firms is a well‑documented fact. Less is known about how the performance of non-participating firms, especially those that are small or medium-sized, changes with exposure to an increase in the presence of globally integrated firms in their vicinity. With global trade being dominated by large firms, the benefits for SMEs are often indirect, e.g. through input relationships with larger companies or through knowledge spillovers that facilitate the adoption of best practices in firms with access to globally integrated peers. This paper combines industry and regional exposure to global links in form of foreign ownership. It uses firm-level microdata for 13 OECD countries, allowing for local spillovers (or crowding out) within the same industry and across industries. Foreign investment in the firm in the same region is associated with increasing productivity of local firms, especially in form of cross-sector externalities. Horizontal (same sector) externalities are negative, especially if they are coming from foreign firms locating in distanced regions. FDI tends to be associated with employment decline in manufacturing firms, but some growth in small firms.