Spillover Effects of Inward Foreign Direct Investment on Labour Productivity: An Analysis on Skill Composition in Manufacturing Industry

Abstract

Using the current 2-digit levels of panel data set from 14 manufacturing industries during the period of 2000–2018, the present study adds to the literature by investigating both technology and knowledge effects from FDI spillovers on labour productivity according to skill composition. Applying the seemingly unrelated regression (SUR) estimator, the outcomes showed that the “technology effects” measured by the number of FDI companies are greater as compared to MNCS’ capital investments and “knowledge” effects in increasing labour productivity. However, the diffusion of FDI knowledge via “learning effects” produced a significant negative relationship with labour productivity across all skill levels. Recognising that improvements in labour productivity are important to ensure that manufacturers remain competitive in line with industry 4.0 requirements, this study concluded that technology and knowledge from FDI spillovers can potentially increase labour productivity, but the success of transferring knowledge and technology depends on employee absorption capacities. Thus, this study highlights the need for employers to provide monetary incentive or personal awards to employees who are able to successfully transfer their FDI’s knowledge and technology through the demonstration and competition effects to other employees.