FDI Spillovers Research Articles

The spillover effect of FDI and its impact on productivity in high economic output regions: A comparative analysis of the Yangtze River Delta and the Pearl River Delta, China

AbstractUsing a dynamic panel data spatial Durbin model, this paper aims to examine FDI spillover and impacts on urban productivity in the Yangtze River Delta (YRD) and the Pearl River Delta (PRD). We find that FDI has positive impacts on local city's productivity but its spatial spillovers behave differently in the YRD and PRD. Spatial interactions cannot be neglected in urban growth; yet YRD and PRD demonstrates significant but opposite spatial growth effects. FDI accelerates the economic growth convergence in the YRD while slows down convergence in the PRD. Positive spatial spillover of productivity occurs in the YRD while negative spatial spillover occurs in the PRD. The results point to important policy implications for the two regions to attract FDI and promote urban development.

FDI spillovers on firm survival in Italy: absorptive capacity matters!

The aim of this paper is to explore the effects of spillovers driven by competition and forward and backward linkages between foreign firms and Italian firms. We adopt the firm dynamics framework, which allows us to test the impact of foreign firms’ activity on the probability that local firms will exit. The empirical analysis relies on continuous survival models (Cox proportional hazard models) and uses a representative firm level database from the period of 2002–2010 with data concerning more than 4,000 Italian manufacturing firms. Our estimates regarding the whole sample show that horizontal and vertical linkages have no impact on firm survival. To further test this finding, we perform a more disaggregated analysis that allows for heterogeneity across firms and sectors. We obtain evidence that the effects of FDI spillovers on firm survival follow specific patterns at both the intra- and inter-industry levels based on differences in productivity between Italian firms and foreign firms and on the technological intensity of the industry. Foreign firms’ activity reduces the exit probability of competitors and of downstream local customers (through forward linkages) with low productivity gap but has no impact on high productivity gap firms. Firms in high technology intensive sectors do not benefit from horizontal FDI while in low and medium technology sectors they do. Differences in absorptive capacity may explain these results. However, we also find that vertical linkages with foreign firms in the upstream supplying industries spur firm duration in medium and high tech sectors.

Foreign direct investment spillover effects in China: Are they different across industries with different technological levels?

Despite the impressive magnitude of inward FDI in China, empirical studies on its spillover effects are relatively scarce and have failed to find conclusive evidence. By exploring a vast firm-level panel dataset, this study aims to test empirically whether the horizontal and vertical FDI spillover effects are different among industries classified by their technological levels. Key findings are as followings: First, foreign investments in the same industry are more likely to engender negative influences on the local Chinese firms. Second, these negative horizontal effects are particularly prominent in low technology sectors. Third, the effects of foreign investments in other industries appear to be positive and significant relatively evenly across industries with different technological levels. Considered in the context of Chinese policies on FDI, these findings suggest that government policies could be a crucial factor in taking advantage of FDI spillovers.

Internationalization and Indigenous Technological Efforts of Emerging Economy Firms: The Effect of Multiple Knowledge Sources

Abstract Getting engaged in competitive international markets motivates exporting firms to enhance their technological competitiveness and invest in research and development (R&D). While in-house R&D investment is important for getting advanced technologies, the technologies needed by exporters located in emerging economies (EEs) typically readily exist overseas. Drawing on organizational learning literature, we argue that the R&D intensity stimulated by exporting may be reduced when 1) EE exporters are better prepared and motivated to absorb foreign knowledge, 2) foreign sources of knowledge are more available, and/or 3) local technology supply is poor. An analysis on 5592 automobile parts and component manufacturers in China during 2005–2007 supports these arguments. To compete in markets abroad, Chinese firms' R&D intensity increases with export intensity when their export intensity is low. As the export intensity exceeds a certain threshold, their R&D intensity starts to decrease as intensive exporters are better prepared and motivated to acquire knowledge from foreign sources. When substitutive foreign knowledge sources such as foreign parents and FDI spillovers in the local industry is available, firms' R&D intensity stimulated by exporting can be further reduced. Better local technology supply can increase the R&D intensity stimulated by exporting.

Firm heterogeneity and development: A meta-analysis of FDI productivity spillovers

We analyse the rich literature on FDI spillovers analysing econometric studies published over 1983–2010 and dealing with national studies in 30 developing countries and emerging markets. We find that these studies ignore two sources of heterogeneity: exports and – especially – R&D. Our meta-analysis corrects for differences in research design (including regional effects, sample size and level of aggregation). We observe positive and significant effects for heterogeneity in terms of labour quality, size and export. This robustness contrasts with contradictory findings for foreign ownership where 63% of the coefficients are insignificant or negative.

Credit Constraints and FDI Spillovers in China

This paper examines whether credit constraints affect Chinese firms’ absorption of productivity spillovers from foreign firms. Using firm-level data for 2001-2005, we find evidence of positive spillovers originating from FDI from countries other than Hong Kong, Macau and Taiwan for non-state owned Chinese firms operating in the same industry and province. Our main finding is that domestic firms operating in industries characterised by a greater reliance on external finance, our measure of credit constraints, enjoy lower (and even negative) spillovers from the activity of foreign-owned firms. This result is robust to the inclusion of a wide variety of other industry-level characteristics interacting with the activity of foreign firms.

Foreign entry and spillovers with technological incompatibilities in the supply chain

Does foreign entry improve host country productivity and welfare? Previous studies have looked at the role of backward linkages with domestic suppliers and their effects on domestic competitors. In this paper, we study how these externalities are affected by technological incompatibilities between foreign and domestic technologies. When foreign technologies require specialized inputs, some local suppliers self-select into production for multinational firms. A decrease in the cost of inputs compatible with the foreign technology has heterogeneous effects. It benefits foreign firms and the most productive downstream domestic firms that adopt the foreign technology, and negatively affects firms using the domestic technology. Technological incompatibilities reduce the welfare gains from openness to FDI, but this negative effect can be overcome by domestic technology adoption. The model's predictions are consistent with the stylized facts drawn from the empirical literature on FDI spillovers.

FDI and market entry/exit: Evidence from China

This paper considers the impact of FDI and FDI-related spillovers on the entry and exit rates of domestic firms in mainland China's manufacturing sector. Since we suspect that aggregate results obscure differing effects based on the source of the FDI, we disaggregate FDI into that originating from Hong Kong, Macau and Taiwan (HMT) area and the rest of the world. The empirical analysis, based on 4-digit industry level panel data over the period 2003–2007, reveals that FDI originating from the rest of the world has made a significant contribution to the entry rate of domestic firms in China and the spillover effect arising from backward linkages is also positive and significant. However, FDI originating from HMT area has not encouraged domestic entry, whilst it has contributed to an increase in the exit rate of domestic firms.

FDI and Technology Spillovers Under Vertical Product Differentiation

When Northern firms undertake FDI in the South, the superior technology they bring to their Southern operations spills over to Southern firms. Technology spillovers accompanied by FDI often enable Southern firms to enhance their product quality. This paper explores a model that incorporates quality-enhancing spillovers in an international duopoly model of vertical product differentiation. We find that the Northern firm, when it chooses to undertake FDI, strategically reduces its product quality to reduce the amount of technology that spills over to the Southern firm. This strategic quality reduction, which is often observed in reality, plays a critical role in welfare consequences and policy implications of quality-enhancing technology spillovers.

Social structure and technology spillovers from foreign to domestic firms

Do domestic firms benefit from the presence of foreign multinational firms? The FDI spillovers literature addresses this very issue, primarily examining whether the presence of foreign firms in a host market leads to technology spillovers and upgrading in domestic firms. A key finding is that spillovers depend on the absorptive capacity of the domestic firm. Yet, in conceptualizing absorptive capacity, scholars have largely overlooked how social structure shapes it. Integrating insights from social networks, technology upgrading, and innovation literatures, I emphasize that a domestic firm's ability to absorb spillovers depends on the social structure it is embedded in. I argue that ties with foreign firms reduce the constraints that domestic firms usually face in searching for and transferring in foreign technologies. However, while search benefits from sparse network structures, transfer is facilitated by cohesive ones. Also, while affect-based ties might motivate foreign firms sufficiently to share information with domestic firms at the search stage, reciprocal benefits and social monitoring conferred by common third-party ties are necessary in the transfer stage. Any effect of ties also depends on the routine repertoire of domestic firms. Put together, these arguments offer a more socialized account of the spillover process.

How do Chinese industries benefit from FDI spillovers?

Abstract Recently, Foreign Invested Enterprises (FIEs) in China have increased their investment in not only production activity but also RD while we do not find significant intra-industry spillovers from FIEs but find robust inter-industries spillover related to TFP, we find substantial intra-industry spillovers promoting invention patent applications but no evidence of inter-industries spillovers. Furthermore, whereas spillovers from FIEs to Chinese firms' TFP stem from their production activities, the source of spillovers related to invention patent applications is mostly through their R&D activity. Our findings indicate a need for multidimensional evaluation of the role of FDI in developing countries.

How to Stir Up FDI Spillovers: Evidence from a Large Meta-Analysis

The voluminous empirical research on horizontal productivity spillovers from foreign investors to domestic rms in transition and developing countries has yielded mixed results. In this paper, we collect 1,205 estimates of horizontal spillovers from the literature and examine which factors inuence spillover magnitude. To identify the most important determinants of spillovers among 43 collected variables, we employ Bayesian model averaging. Our results suggest that horizontal spillovers are on average zero, but that their sign and magnitude depend systematically on the characteristics of the domestic economy and foreign investors. The most important determinants are the technology gap between domestic and foreign rms and the ownership structure in investment projects. Foreign investors who form joint ventures with domestic rms and who come from countries with a modest technology edge create the largest benets for the domestic economy.

FDI, Skill-Specific Unemployment, and Institutional Spillover Effects

This paper studies interaction and cross-country-spillover effects between FDI and labor markets in a Feenstra and Hanson type of trade model with imperfect labor markets due to search friction a la Pissarides (2000). I can show that FDI outflows increase aggregate equilibrium unemployment in the FDI sending country whereas the receiving country benefits from FDI-inflows and expands production to industries formerly associated to the sending country. The analysis of unemployment in a continuum of industries framework fascilitates the distinction between adjustments at the intensive and extensive margin of labor demand resulting in an ex-ante ambiguous effect of FDI on unemployment. Changes in labor market institutions also affect FDI-flows and lead to spillover effects between the integrated countries’

FDI spillovers and Intellectual Property Rights

This paper extends the Symeonidis’s (2003) oligopoly model to discuss how FDI spillovers that decrease the quality difference between vertically differentiated products of home and foreign firms affect the home firm’s decision on plant location. This paper shows that whether the degree of spillover is exogenous or endogenous, it may have a positive relationship with a unit trade cost. It also shows that in an oligopoly model with two home firms, FDI is more likely than in a duopoly case. The hypothesis in the duopoly model is supported by the cross-country regression over 41 for developing/emerging economies.

Credit Constraints and FDI Spillovers in China

This paper provides firm-level evidence on the way in which credit constraints affect FDI spillovers. Using a panel of approximately 20,000 Chinese manufacturing firms over the period 2001-2005, we show that credit constrained domestic firms have lower (even negative) FDI spillovers, with their reduction in the spillover effect being systematically greater in sectors with higher levels of external financial dependence. Moreover, non-state domestic firms in financially dependent sectors have lower from FDI spillovers when compared to the state-owned domestic firms. We also show that domestic firms in sectors that are capital-intensive, highly tangible, and that manufacture durable and highly tradable goods benefit from larger FDI spillovers compared to firms in labor-intensive sectors. Our findings highlight the importance of credit constraints, host country financial institutions in determining the extent of FDI spillovers.

Connecting the Missing Link between Micro and Macro

Using a panel of 20,460 Chinese manufacturing firms over the period 2001-2005, we apply both parametric and non-parametric estimation techniques to examine the underlying relationship between the economic development of the host province and FDI spillovers. We find that provincial economic development does not systematically influence FDI spillovers. Moreover, there exists considerable heterogeneity in the FDI spillovers not only across the 29 provinces, municipalities and autonomous regions but also across the 10 manufacturing sectors within each of the 29 provinces, municipalities and autonomous regions. This suggests that FDI spillovers in China may be affected by a combination of both the characteristics of the sector within a province and the characteristics of the province itself.

Reverse innovation, emerging markets, and global strategy

Abstract‘Reverse innovation’ refers to the case where an innovation is adopted first in poor (emerging) economies before ‘trickling up’ to rich countries. Although examples of reverse innovation are still rare, it raises interesting theoretical questions, such as what kinds of innovation emerging economies are likely to spawn, why such innovations might diffuse to rich countries, what competitive advantages local and foreign firms enjoy in this process, and how it affects the global strategy and organization of established MNEs. Research on reverse innovation can enrich and extend mainstream theories of innovation, internationalization, MNE management, and FDI spillovers.

FOREIGN OWNERSHIP, PRODUCTIVITY, AND ECONOMIC CRISIS

This paper evaluates the productivity benefit from the present of foreign ownership in manufacturing firms. The productivity benefit is analysed for the period before crisis (19881996) and the period crisis onwards (1997-2000). Using the methodology of stochastic production frontier, the results show that foreign ownership generates positive productivity benefit to local manufacturing firms, both during the before crisis period and during the crisis onwards period. An interesting result emerges when comparing the two periods. Although positive spillover benefits exist in both periods, the coefficient of FDI Spillovers is larger during the period of crisis onwards, suggesting that the productivity benefit increase after economic crisis. These findings support an argument by Takii (2007) that economic crisis has positive impact on the productivity spillovers of FDI.

FDI Spillovers and Intellectual Property Rights

It is to discuss how FDI spillovers that decreases the quality difference between vertically differentiated products of the home and foreign firms affects the home firm’s decision on plant location.

Reconceptualizing the spillover effects of foreign direct investment: A process-dependent approach

Theory suggests that FDI spillovers are a function of the level of foreign presence. We extend this view by developing and testing the premise that variations in spillover effects are the result of differences in the process of foreign entry. Drawing from the concept of time compression diseconomies, we develop the constructs of pace and irregularity of foreign entry, and demonstrate that they negatively moderate the relationship between the level of foreign presence and the productivity of host-country firms. We also explain how and why the moderating role of the process of foreign entry is influenced by the intensity of R&D and technical knowledge in domestic industries. We find evidence that firms operating in low-tech sectors are better able to absorb fast foreign entry.