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Do domestic firms benefit from foreign direct investment? Evidence from panel data

  • Aitken, Brian
  • Harrison, Ann
  • DEC

Many developing countries now actively solicit foreign investment, offering firms subsidies, tax holidays, and exemptions from import duties. One justification for subsidizing these firms is the so-called spillover of technology from foreign to domestic firms. Using panel data -- following more than 4,000 Venezuelan firms from 1975 through 1989 -- The authors explore two aspects of the effect of foreign direct investment. First, they examine the relative performance to joint ventures and domestic firms. They find that increases in foreign equity participation are strongly correlated with increases in plant productivity. Second, they measure the impact of joint ventures and foreign subsidiaries on plants with no foreign investment. Facing fewer data limitations than in previous studies, they find that foreign investment negatively affects the productivity of domestically owned plants. These results suggest that whatever technology gains occur through foreign investment are captured entirely by joint ventures.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1248.

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Date of creation: 28 Feb 1994
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Handle: RePEc:wbk:wbrwps:1248
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  1. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-71, June.
  2. Blomstrom, Magnus & Wolff, E.N., 1989. "Multinational Corporations And Productivity Convergence In Mexico," Working Papers 89-28, C.V. Starr Center for Applied Economics, New York University.
  3. Horstmann, Ignatius J & Markusen, James R, 1989. "Firm-Specific Assets and the Gains from Direct Foreign Investment," Economica, London School of Economics and Political Science, vol. 56(221), pages 41-48, February.
  4. James E. Rauch, 1991. "Productivity Gains From Geographic Concentration of human Capital: Evidence From the Cities," NBER Working Papers 3905, National Bureau of Economic Research, Inc.
  5. Willmore, Larry, 1976. "Direct foreign investment in Central American manufacturing," World Development, Elsevier, vol. 4(6), pages 499-517, June.
  6. Steven Globerman, 1979. "Foreign Direct Investment and `Spillover' Efficiency Benefits in Canadian Manufacturing Industries," Canadian Journal of Economics, Canadian Economics Association, vol. 12(1), pages 42-56, February.
  7. Willmore, Larry N., 1986. "The comparative performance of foreign and domestic firms in Brazil," World Development, Elsevier, vol. 14(4), pages 489-502, April.
  8. Rugman, Alan M, 1986. "New Theories of the Multinational Enterprise: An Assessment of Internalization Theory," Bulletin of Economic Research, Wiley Blackwell, vol. 38(2), pages 101-18, May.
  9. Blomstrom, Magnus, 1986. "Foreign Investment and Productive Efficiency: The Case of Mexico," Journal of Industrial Economics, Wiley Blackwell, vol. 35(1), pages 97-110, September.
  10. Helleiner, G.K., 1989. "Transnational corporations and direct foreign investment," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 27, pages 1441-1480 Elsevier.
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