SPILLOVER EFFECTS OF FOREIGN DIRECT INVESTMENT ON DOMESTIC MANUFACTURING FIRMS IN THAILAND

Abstract

This study investigates technological spillovers of foreign direct investment (FDI) in horizontal, upstream, and downstream industries on domestic manufacturing firms in Thailand, using firm level data from the 2012 industrial census conducted by the National Statistical Office. First, we measure total factor productivity (TFP) and estimate stochastic production frontier to find technical efficiency of firms. Next, we examine impacts of the FDI and other factors on the TFP and technical efficiency of domestic firms. The results provide no evidence on spillover effects of the FDI in horizontal industries on either the TFP or technical efficiency of domestic firms. While the FDI in upstream industries shows negative spillover effects, the FDI in downstream industries reveals positive and significant spillover effects on firms in all industry groups. Firm-specific characteristics such as age, size, availability of imported raw materials, location at industrial estates, and R&D activities all had positive effects on firms’ TFP and technical efficiency in total industries. Although export capability had a positive impact on total factor productivity and technical efficiency of domestic firms in the capital and technology-intensive industries, the effect was insignificant in the labor-intensive ones. The findings imply limited spillover effects of the FDI on domestic firms but highlight favorable effects of the openness policy (affecting availability of imported raw materials and exports), infrastructural investment (available in the industrial estates), and R&D activities. Incentives should be given to the FDI with vertical linkages with domestic input suppliers in order for local firms to gain the most from FDI technology transfers.