Do Foreign Ownership Modes Matter for FDI Spillovers?

Abstract

The welfare-enhancing role of spillovers from foreign direct investment (FDI) in a host country generates significant interests and debates among policymakers, long after a wide range of regulatory changes in favour of FDI in the late 1980s and the 1990s. The expectation of positive spillovers reinforces the development of government policies to attract multinational enterprises (MNEs) to the host country. However, as is documented in surveys of the literature on FDI spillovers (Gorg and Strobl, 2001; Havranek and Irsova, 2012; Meyer and Sinani, 2009; Wooster and Diebel, 2010), the empirical evidence on FDI spillovers is rather mixed. The surveys highlight two important factors that might offer the explanations of mixed findings. First, the degree of foreign ownership is a primary factor in determining the strength of linkages between domestic and foreign firms and thereby affects spillovers (Javorcik and Spatareanu, 2008). As argued by Gorg and Greenaway (2004), MNEs may be effective at preventing spillover effects of firm-specific assets. This is connected to the ownership strategies of MNEs that often use wholly owned subsidiaries (WOS) to better control the technologies they transfer to their foreign locations. Second, absorptive capacity of domestic firms and the strength of linkages between domestic and foreign firms are critical for spillovers. However, studies taking these factors into consideration are sparse. According to Havranek and Irsova (2012), among 1205 horizontal spillover estimates from 52 studies, only 5.7 per cent and 7.8 per cent control for absorptive capacity of domestic firms and the strength of linkages between domestic and foreign firms, respectively.