Sectoral Patterns of Inward FDIs and Domestic Productivity in Europe*

Abstract

This paper describes the sectoral patterns of foreign direct investment in France, Italy and Spain, using a novel data set on manufacturing firms for the 1993–97 period. Significant heterogeneities emerge across countries in terms of weight and distribution of foreign presence, and in terms of productivity levels of multinational firms. It is shown that such structural diversities can help explain the different impact of foreign owned activities on labour productivity of domestic firms in these countries. Based on this evidence some critical considerations are made on both the “catching up” hypothesis, which identifies a positive relation between the size of technological gaps and growth opportunities induced by foreign investments; and the “technological accumulation” hypothesis, which stresses the role of domestic absorptive capacity and of coherence between foreign and domestic technology as determinants of virtuous effects of inward investments. Policy implications are drawn, concerning the selection and promotion of inward investments in advanced countries. JEL: F23, L23