FDI and spillovers: New evidence from Malaysia’s manufacturing sector

Abstract

AbstractThe spillover effects of foreign direct investment (FDI) are often viewed as potential contributors to economic growth and development in developing countries. As a developing country that adopts a proactive stance towards FDI, Malaysia provides a good setting to investigate whether and to what extent FDI‐induced spillovers potentially benefit national firms. Using an unpublished establishment‐level dataset comprising 10,953 manufacturing firms in 2015, this study examined the productivity and spillover effects of foreign manufacturing firms on national firms in Malaysia. While foreign firms exhibited higher productivity than national firms, the results showed that FDI generates high spillovers on national firms among FDI‐concentrated industries, but not on industries with low FDI concentrations. In response to methodological call by Melitz’s new‐new trade theory to include firms’ heterogeneity to understand the economy at macro‐ level, this study contends that the presence and extent of FDI‐induced spillover benefits on national firms depends on industry and firm characteristics. Thus, policy instruments must consider sector‐ and firm‐ specific characteristics to appropriate FDI spillovers as an enabler for national firms to survive, learn, catch up, and eventually compete in the global market.