Foreign Direct Investment and Managerial Knowledge Spillovers through the Diffusion of Management Practices

Abstract

abstractAlthough managerial knowledge spillovers have long been claimed to be a major benefit of foreign direct investment (FDI), such spillovers have not yet been systematically analysed. This paper adds to the literature by analysing the nature and extent of managerial knowledge spillovers from FDI through the diffusion of management practices. Taking into account the tacit and explicit elements of management practices and distinguishing between industry and non‐industry specific practices, the paper identifies different types of spillovers and discusses their transmission mechanisms. Evidence from establishment‐level panel data from the UK attests to the existence and significance of intra‐industry, linkage, and non‐linkage based inter‐industry spillovers of managerial knowledge from foreign to local firms, although the strength varies for different types of practices. The spillovers are geographically localized, especially in channels without supply chain linkages. Local firms are selective in the adoption of individual practices and the spillover effects are more significant at the cluster and management system level. Reverse spillovers from local firms to MNEs from industrialized countries appear to be limited despite significant spillovers of practices amongst local firms.