Foreign direct investment and productivity spillovers in Irish manufacturing industry: evidence from plant level panel data

Abstract

It is often argued that foreign firms may enhance the productivity of indigenous firms in an economy, through forward or backward linkages. Such externality effects typically are called “productivity spillovers”. In terms of foreign direct investment (FDI), Ireland is one of the most globalized economies in the world, having pursued a strategy of promoting investment by foreign companies for over 40 years. This article examines possible productivity spillovers from foreign‐owned firms to indigenous firms in the Irish manufacturing sector, using plant‐level data on all manufacturing firms for the period 1991–1998. Despite Irish policy commitment to building linkages between foreign and domestic firms, we find only weak evidence of spillovers and this evidence is sensitive to the definition and measurement of foreign presence.