Modeling FDI-Induced Technology Spillovers

Abstract

While previous theoretical works have explored mechanisms through which technology spillovers occur, little attention has been paid to clarifying the necessary conditions for FDI-induced technology spillovers. Motivated by recent empirical findings, this article provides a theoretical framework to characterize FDI's spillover effects in terms of host countries' comparative advantage. The analysis shows that the degree of spillovers varies depending on the interaction of industry and country characteristics. Skilled labor scarce countries have spillover effects only in low-tech industries, while skilled labor abundant countries have spillover effects in high-tech industries. The magnitudes of technology spillovers are smaller for skilled labor scarce countries as compared to skilled labor abundant countries.