Spillovers and productivity: Revisiting the puzzle with EU firm level data

Abstract

We revisit the puzzle of FDI spillovers on Total Factor Productivity (TFP) of domestic firms using evidence from six EU countries. Previous literature fails to uncover knowledge spillovers from MNEs operating in the same industry (horizontal) and upstream industries (forward) as it neglects the role of geographical proximity in the case of horizontal spillovers and the role of direct ties between domestic and foreign firms as well as the scope of product differentiation of domestic firm in the case of forward spillovers. The present paper incorporates these new aspects in the identification of horizontal and forward spillovers and shows that economic gains from the presence of MNEs in the domestic economy can be collectively close to 6.1%. Our findings provide one of the missing links highlighted in the meta-analysis of Havranek and Irsova, (2011) and reinstate the importance of FDI as a source of productivity enhancement for local firms. From a policy perspective, our results reheat the debate about appropriate policies that increase MNEs’embeddedness within the local economy.