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Foreign Investment and Domestic Productivity: Identifying Knowledge Spillovers and Competition Effects

Author

Listed:
  • Vadym Volosovych

    (Erasmus University Rotterdam)

  • Carolina Villegas Sanchez

    (ESADE Business School)

  • Bent Sorensen

    (University of Houston)

  • Sebnem Kalemli-Ozcan

    (University of Maryland)

Abstract

We identify knowledge spillovers from foreign investment to domestic firms using novel measures of ``closeness'' of foreign-owned and domestic and domestic firms in product space and in technology space. We rely on a new data set that spans six advanced countries connecting firms internationally in order to, a) separate competition effects on domestic firms from knowledge spillovers when domestic and foreign-owned firms are close in product space, and b) identify spillovers from foreign-owned firms that are close to domestic firms in technology space. We find strong negative competition effects on domestic firms that produce in the same {four-digit} sector as the foreign firms and positive knowledge spillovers to domestic firms operating in the same {two-digit} sector (but in different four-digit sectors). Using a measure of ``technological closeness,'' building on the work of Bloom, Schankerman, and van Reenen (2013), we find significant knowledge spillovers to firms which are close in technology space. On average, knowledge spillovers explain 60 percent of the total factor productivity improvement for domestic firms that are technologically close to foreign firms.

Suggested Citation

  • Vadym Volosovych & Carolina Villegas Sanchez & Bent Sorensen & Sebnem Kalemli-Ozcan, 2017. "Foreign Investment and Domestic Productivity: Identifying Knowledge Spillovers and Competition Effects," 2017 Meeting Papers 1194, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1194
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    References listed on IDEAS

    as
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    Cited by:

    1. Henning Mühlen & Octavio Escobar, 2020. "The role of FDI in structural change: Evidence from Mexico," The World Economy, Wiley Blackwell, vol. 43(3), pages 557-585, March.
    2. Girum Abebe & Margaret McMillan & Michel Serafinelli, "undated". "Foreign Direct Investment and Knowledge Diffusion in Poor Locations," Working Paper series 20-14, Rimini Centre for Economic Analysis.
    3. Köllő, János & Boza, István & Balázsi, László, 2020. "Wage Gains from Foreign Ownership: Evidence from Linked Employer-Employee Data," IZA Discussion Papers 13040, Institute of Labor Economics (IZA).
    4. Dyaran Bansraj & Han Smit & Vadym Volosovych, 2020. "Can Private Equity Funds Act as Strategic Buyers? Evidence from Buy-and-Build Strategies," Tinbergen Institute Discussion Papers 20-041/IV, Tinbergen Institute.
    5. Hou, Zhezhi & Jin, Man & Kumbhakar, Subal C., 2020. "Productivity spillovers and human capital: A semiparametric varying coefficient approach," European Journal of Operational Research, Elsevier, vol. 287(1), pages 317-330.
    6. Man Jin & Huiting Tian & Subal C. Kumbhakar, 2020. "How to survive and compete: the impact of information asymmetry on productivity," Journal of Productivity Analysis, Springer, vol. 53(1), pages 107-123, February.
    7. János Köllő & István Boza & László Balázsi, 2021. "Wage gains from foreign ownership: evidence from linked employer–employee data," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 55(1), pages 1-21, December.
    8. 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.
    9. Bloechliger, H. & Wildnerova, L., 2020. "Productivity of the Russian firms: Seven stylized facts," Journal of the New Economic Association, New Economic Association, vol. 48(4), pages 217-227.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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