Does Foreign Direct Investment Increa the Productivity of Domestic Firms?
In Search of Spillovers through Backward Linkages
Beata K. Smarzynska*
Abstract: Many countries aim to attract foreign direct investment (FDI) by offering ever more generous incentive packages and justifying their actions with the expected knowledge externalities to be generated by foreign affiliates. Despite being hugely important to public policy, there is little conclusive evidence to support this claim. This study examines firm-level data from Lithuania in an effort to further our understanding of this issue. The empirical results are consistent with the existence of productivity spillovers from FDI taking place through contacts between foreign affiliates and their local suppliers in upstream ctors but there is no indication of spillovers occurring within the same industry. The data indicate that spillovers are not restricted geographically, since local firms em to benefit from the operation of foreign affiliates both in their own region and in other parts of the country. Moreover, we find that greater productivity benefits are associated with domestic-market- rather than export-oriented foreign companies. We detect no difference, however, between the effects of fully-owned foreign firms and tho with joint domestic and foreign ownership.
Keywords: spillovers, foreign direct investment, technology transfer
JEL classification: F23
World Bank Policy Rearch Working Paper 2923, October 2002
The Policy Rearch Working Paper Series disminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the ries is to get the findings out quickly, even if the prentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expresd in this paper are entirely tho of the authors. They do not necessarily reprent the view of the World Bank, its Executive Directors, or the countries they reprent. Policy Rearch Working Papers are available online at econ.worldbank.
* The World Bank, 1818 H St, NW, MSN MC3-303, Washington DC, 20433. Tel. (202) 458-8485. Email: bsmarzynska@worldbank. I wish to thank Enrique Aldaz-Carroll, Andrew Bernard, Simon Evenett, Holger甲骨文的字
代销协议
Görg, Mary Hallward-Driemeier, Pravin Krishna, Hiau Looi Kee, Maryla Maliszewska, Jacques Moris
t, Marcelo Olarreaga, Maurice Schiff, Matt Slaughter, Mariana Spatareanu and the participants of the Tuck International Trade Summer Camp for valuable comments and suggestions. The financial support received from the Foreign Investment Advisory Service (FIAS) − a joint facility of the IFC and the World Bank − is gratefully acknowledged. This paper is part of a larger FIAS effort to improve the understanding of spillovers from multinational corporations to local firms.
Introduction
Following the advice of multilateral development agencies, policymakers in many developing and transition economies place attracting foreign direct investment (FDI) high on their agenda, expecting FDI inflows to bring new technologies, know-how and thus contribute to increasing productivity and competitiveness of domestic industries. Many countries go beyond national treatment of multinationals by offering foreign companies, through subsidies and tax holidays, more favorable conditions than tho granted to domestic firms.1 As the economic rationale for this special treatment, policy makers cite positive externalities generated by FDI through productivity spillovers to domestic firms.
The only trouble is that there is no proof that positive productivity externalities generated by foreign p
蝴蝶效应1rence actually exist. As Dani Rodrik (1999) remarked, “today’s policy literature is filled with extravagant claims about positive spillovers from FDI but the evidence is sobering.” And indeed the difficulties associated with dintangling different effects at play and data limitations have prevented rearchers from providing conclusive evidence of positive externalities resulting from FDI. While recent firm-level studies have overcome many of the difficulties faced by the earlier literature, the message emerging from them is not very optimistic.
The existing literature on this subject is of three kinds. First, there are ca studies including descriptions pertaining to particular FDI projects or specific countries, which however rarely offer quantitative information and are not easily generalized (e for instance, Rhee and Belot, 1989; Moran 2001). Then there is a plethora of industry level studies, most of which show a positive correlation between foreign prence and ctoral productivity.2 Their downside is the difficulty in establishing the direction of the causality. It is possible that this positive association is caud by the fact that multinationals tend to locate in high productivity industries rather than by genuine productivity spillovers. It may also be a result of FDI inflows forcing less
1 For instance, in the late 1980s, the state of Kentucky offered Toyota an incentive package worth (in prent value) 125-147 million dollars for a plant expected to employ 3,000 workers. In 1991, Motor
ola was paid 50.75 million pounds to locate a mobile-phone factory employing 3,000 people in Scotland (Haskel et al., 2001, p. 1). FDI incentives are also offered by developing and transition economies. As an illustration may rve the fact that foreign firms in Hungary received 92.6 percent of all tax concessions provided in the country in 2000 (Csaki, 2001, p. 16).
2 See, for example, the pioneering work by Caves (1974) focusing on Australia, Blomström and Persson’s (1983) and Blomström and Wolff’s (1994) papers on Mexico and the summary of studies on Mexican data by Blomström (1989).
productive domestic firms to exit and/or multinationals increasing their share of host country market, both of which would rai the average productivity in the industry. Finally, there is rearch bad on firm-level panel data, which examines whether productivity of domestic firms is correlated with the extent of foreign prence in their ctor or region. However, most of the studies, such as for instance, careful analys done by Haddad and Harrison (1993) on Morocco, Aitken and Harrison (1999) on Venezuela and Djankov and Hoekman (2000) on the Czech Republic cast doubt on the existence of spillovers from FDI in developing countries. They either fail to find a significant effect or produce the evidence of negative horizontal spillovers, i.e., the effect the prence of multinationa l corporations has on domestic firms in the same ctor. The picture is more optimistic in the ca of i
ndustrialized countries as a recent paper by Haskel, Pereira and Slaughter (2002) gives convincing evidence of positive FDI spillovers taking place in the UK.3
了字组词It is possible, though, that rearchers have been looking for FDI spillovers in the wrong place. Since multinationals have an incentive to prevent information leakage that would enhance the performance of their local competitors, but at the sam e time might want to transfer knowledge to their local suppliers, spillovers from FDI are more likely to be vertical rather than horizontal in nature. In other words, spillovers are most likely to take place through backward linkages, that is contacts between domestic suppliers of intermediate inputs and their multinational clients, and thus they would not have been captured by the earlier studies.4 As Blomström et al. (2000) point out, however, there are hardly any empirical studies analyzing explicitly the relationship between linkages and spillovers. The notable exceptions are two recent papers by Blalock (2001) and Schoors and van der Tol (2001), which provide evidence of positive FDI spillovers through backward linkages.5 Moreover, despite the keen interest of policy makers in the subject, little is known about factors driving vertical spillovers. This study takes the first step towards filling this gap in the literature.
The purpo of this study is twofold. First, we examine whether the productivity of domestic firms is correlated with the prence of multinationals in downstream ctors (i.e., their
3 For a survey of the literature on horizontal spillovers from FDI e Görg and Strobl (2001).
4 For a theoretical justification of spillovers through backward linkages e Rodriguez-Clare (1996), Markun and Venables (1999) and Saggi (2002). For ca studies e Moran (2001).
5 Kugler (2000) also finds inter-ctoral technology spillovers from FDI in Colombia. However, he does not distinguish between different channels through which such spillovers may be occurring (e.g., backward versus forward linkages).
potential customers). Detecting such an effect would be consistent with the existence of broadly defined spillovers through backward linkages. We improve over the existing literature by taking into account econometric problems that may have biad the results of earlier work. Namely, we employ the miparametric estimation method suggested by Olley and Pakes (1996) to account for endogeneity of input demand. Moreover, we correct standard errors to take into account the fact that the measures of potential spillovers are industry specific while the obrvations in the data t are at the firm level. As Moulton (1990) pointed out, failing to make such a correction will lead to rious downward bias in the estimated errors thus resulting in spurious finding of statistical significance for the aggregate variable of interest.
Second, we go beyond the existing literature by shedding some light on determinants of spillovers. We examine whether potential benefits stemming from vertical linkages are related to export-orientation of multinationals in downstream ctors and the extent of foreign ownership in affiliates. Bad on ca studies and investor surveys, the factors have often been conjectured to influence the extent and benefits of backward linkages, but to the best of our knowledge, their impact has not been systematically examined.6
西安南湖Our analysis is bad on the data from the annual enterpri survey conducted by the Lithuanian Statistical Office. The survey coverage is extensive, as firms accounting for about 85 percent of output in each ctor are included. The data constitute an unbalanced panel spanning over the period 1996-2000. Focusing on a transition economy, such as Lithuania, ems very suitable for this project as the endowment of skilled labor enjoyed by transition countries makes them a particularly likely place where productivity spillovers could manifest themlves.7 Our results can be summarized as follows. We find empirical evidence consistent with the existence of positive spillovers from FDI taking place through backward linkages but no indication of spillovers occurring through horizontal channels. In other words, firm productivity is positively correlated with the extent of potential contacts with multinational customers but not with the prence of multinationals in the s自我介绍表格
ame industry. The data also indicate that the correlations are not local in nature, that is, they are not restricted exclusively to foreign firms operating in the same region of the country. The magnitude of the effect is economically
6 See UNCTC (2001, chapter 4) for a comprehensive review of this topic.
7 For instance, during 1990-2000 the number of scientists and engineers in R&D activities per million people was equal to 2,031 in Lithuania, as compared to 2,139 in Korea, 711 in Argentina, 168 in Brazil and 154 in Malaysia (Global Economic Indicators, 2002, World Bank).
meaningful as a ten percent increa in the foreign prence in downstream ctors is associated with a 0.38 percent ri in output of each firm in the supplying industry. As for the determinants, we find that the productivity effect is larger when the multinationals in the sourcing ctor are oriented towards supplying the domestic market rather than focusing mainly on exporting. Finally, there is no statistically significant difference between the productivity effects associated with partially- and fully-owned foreign projects.
In summary, this paper adds to the understanding of externalities generated by FDI in a host country economy, which is a hugely important issue for public policy. Our finding of positive correlation betw
鹿晗什么星座een firm productivity and multinational prence in downstream ctors is, however, by no means a call for subsidizing FDI. The results are consistent with the existence of knowledge spillovers from foreign affiliates to their local suppliers but they may also be due to incread competition in upstream ctors. The latter may be the ca if multinationals entering downstream ctors force less productive domestic producers to exit thus lowering the demand for domestically produced intermediates, either becau they are more efficient and need fewer inputs8 or they choo to import their inputs (due to their higher quality, constraints impod by the parent company, etc.). The welfare implications of the two scenarios are quite different. While the former ca would call for FDI incentives, it would not be the optimal policy in the latter. More rearch is certainly needed to dintangle the effects.
This study is structured as follows. In the next ction, we briefly discuss vertical spillovers and their determinants, followed by a description of FDI inflows into Lithuania. Then we introduce our data and the estimation strategy. In the following s ection, we prent the empirical results. We conclude in the closing ction.
Vertical Spillovers and Their Determinants
Productivity spillovers from FDI take place when the entry or prence of multinational corporations increas productivity of domestic firms in a host country and the multinationals do not fully internalize the value of the benefits. Spillovers may take place when local firms
8 See Saggi’s (2002) model for such a scenario.猴子搬包谷的故事
