Productivity spillovers through backward linkages: The role of the origin of investors and absorptive capacity of domestic firms

• Author: Ousmanou Njikam,Roland Rostant Njiteu Leudjou
• Date: 01 May 2019
• DOI: http://doi.org/10.1111/rode.12579
• Published date: 01 May 2019

REGULAR ARTICLE

Productivity spillovers through backward linkages:

The role of the origin of investors and absorptive

capacity of domestic firms

Ousmanou Njikam

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Roland Rostant Njiteu Leudjou

University of Yaoundé II, Cameroon

Correspondence

Ousmanou Njikam, Faculty of Economics

& Management, University of Yaoundé

II, B.P. 1365, Yaoundé, Cameroon.

Emails: ousmanou.njikam@

univ-yaounde2.org and

onjikam2002@yahoo.fr

Funding Information

African Economic Research Consortium

(AERC), Grant Number: RT14541.

Abstract

We argue that multinationals from different home coun-

tries have different technologies and input sourcing

behavior. These differences impinge on potential produc-

tivity spillovers through backward linkages of multina-

tionals and such effects also differ across host local firms

depending on their absorptive capacity. Using a panel of

Cameroonian manufacturing firms over the period 1993

to 2005, we find supportive evidence of these arguments.

There is a negative relationship between the presence of

American and European affiliates in downstream sectors

and the productivity of Cameroonian firms in the supply-

ing industries and a positive correlation in the case of

Asian affiliates. The absorptive capacity of Cameroonian

firms mainly explains these divergent results.

PACS

O12, F23

KEYWORDS

absorptive capacity, backward linkages, foreign investor origin, Foreign

presence

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INTRODUCTION

Technology plays a key role in determining productivity (Easterly & Levine, 2001). Developing

countries (LDCs) carry out very little (if any) own research and development (R&D ), so, they rely

on foreign technology from developed economies. There are two main modes of technology trans-

fer across countries: international trade and foreign direct investment (FDI). As regards the latter

DOI: 10.1111/rode.12579

Rev Dev Econ. 2019;23:677–701. wileyonlinelibrary.com/journal/rode © 2019 John Wiley & Sons Ltd

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mode, multinational enterprises (MNEs) use a “superior”level of technology that may “spill”to

indigenous firms. These expected knowledge externalities led many LDCs to implement policies

promoting FDI.

The literature recognizes at least two channels through which the presence of MNEs may spill

over to local firms. The first is the so‐called horizontal linkages, that is, the benefits to domestic

firms operating in the same industries as the MNEs (UNCTAD, 2001).

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The second channel hap-

pens through vertical linkages both at backward level (i.e., benefits to domestic firms that operate

in sectors that supply inputs to MNEs) and at forward level (i.e., benefits to domestic firms that

operate in industries that buy goods and services from MNEs) (Barrios, Görg, & Strobl, 2011).

There is a widespread agreement that FDI spillovers are more likely to take place through vertical

linkages. In particular, we focus on backward linkages because it is widely recognized that in most

LDCs, most foreign affiliates are export oriented and do not generally supply to domestic cus-

tomers (Javorcik, 2004).

Past studies have provided mixed findings on spillovers from backward linkages in LDCs. Two

main reasons underlie these mixed results, for example, the country origin of foreign firms and the

absorptive capacity of domestic firms in host countries. FDI's country origin affects the degree of

backward linkages through two main channels, for example, the distance between the host and

source countries and preferential trade agreements (Hanson, Mataloni, & Slaughter, 2005; Marku-

sen & Venables, 1999; Rodriguez‐Clare, 1996). For example, because it is expensive for them to

import inputs from home countries, investors from distant countries are likely to use more local

inputs. Tariffs on imports are much lower among member countries of preferential trade agree-

ments, affecting the sourcing pattern. The spillovers from backward linkages involve a proces s in

which domestic firms in host LDCs learn from foreign affiliates. Thus, to better understand how

backward linkage spillovers actually occur, it is also important to take into account the capacity of

domestic firms to learn.

The FDI source countries also differ in their technological advantage. It is widely accepted that

the United States is the technological leader. This gives the U.S. affiliates a technological leader-

ship vis‐à‐vis affiliates from Europe and Asia (Criscuolo & Martin, 2009; Girma & Görg, 2007).

Therefore, the technology gap between foreign and host LDCs local firms may be higher for U.S.

affiliates than for European and Asian affiliates, affecting the productivity‐enhancing effect of FDI

source countries. Overall, foreign investors from countries with less technological advantage may

create benefits for the domestic firms that have the ability to actually reap the potential benefits of

FDI. In contrast, the reverse may be true for foreign investment from countries with leading‐edge

technologies.

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Moreover, business system, industrial relations regime, and institutional background

influence a wide range of strategic and organizational characteristics of multinationals (Fortanier,

2007). Hence, we may expect different effects also from that point of view between U.S., Euro-

pean, and Asian firms.

Therefore, this paper seeks to shed light on three empirical questions. First, are there productiv-

ity spillovers from backward linkages to domestic firms in LDCs? Second, if so, do the backward

spillover effects differ by the FDI country of origin? Finally, does the backward spillover effect of

FDI country origins depend upon the domestic firms’capacity to learn from FDI? We will provide

answers to these questions using firm‐level data in nine key Cameroonian manufacturing industries

over the period 1993 to 2005. Cameroon makes for an interesting case study because since the

mid‐1990s the country has implemented an attractive FDI program. Furthermore, the study covers

a post‐FDI liberalization period. This provides a natural experiment for examining the relationship

between foreign presence and the productivity of domestic firms in a developing economy, which

is under‐studied.

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