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

Author

Listed:
  • Aitken, Brian
  • Harrison, Ann
  • DEC

Abstract

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.

Suggested Citation

  • Aitken, Brian & Harrison, Ann & DEC, 1994. "Do domestic firms benefit from foreign direct investment? Evidence from panel data," Policy Research Working Paper Series 1248, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1248
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    References listed on IDEAS

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    1. 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.
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    3. Willmore, Larry, 1976. "Direct foreign investment in Central American manufacturing," World Development, Elsevier, vol. 4(6), pages 499-517, June.
    4. Willmore, Larry N., 1986. "The comparative performance of foreign and domestic firms in Brazil," World Development, Elsevier, vol. 14(4), pages 489-502, April.
    5. 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.
    6. 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.
    7. 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.
    8. Rauch James E., 1993. "Productivity Gains from Geographic Concentration of Human Capital: Evidence from the Cities," Journal of Urban Economics, Elsevier, vol. 34(3), pages 380-400, November.
    9. 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.
    10. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-471, June.
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