Technology Spillovers from FDI. Evidence on the Intensity of Different Spillover Channels

• Date: 01 December 2016
• Author: Cristina Jude
• DOI: http://doi.org/10.1111/twec.12335
• Published date: 01 December 2016

Technology Spillovers from FDI.

Evidence on the Intensity of Different

Spillover Channels

Cristina Jude

Banque de France, Paris, France and Laboratoire d’

economie d’Orl

eans, Universit

e d’Orl

eans, France

1. INTRODUCTION

TECHNICAL progress is a key factor in economic growth due to its productivity enhance-

ment effect. As most innovation and new technologies are created in developed countries,

the only option for developing and emerging countries, such as those in Eastern Europe, is to

import that technology through various channels, like trade or foreign direct investment (FDI).

In this context, FDI has been seen as the cheapest (Blomstrom and Kokko, 1998) and the most

effective form of international technology transfer (Campos and Kinoshita, 2002), thus becom-

ing a significant determinant of technological upgrading and economic development in host

countries. As foreign affiliates enter the local market, they enjoy a technological advantage

stemming from the firm-specific assets transferred internally from the multinational (Markusen

and Venables, 1999). However, the main interest in attracting FDI originates in the associated

multiplier effect, as knowledge is supposed to spill over from foreign affiliates to domestic

firms.

Countries in Central and Eastern Europe (CEEC) have had a past of industrialised econo-

mies, struggling after the fall of communism with an obsolete capital stock and a large tech-

nological gap. Since economic restructuring required considerable effort, these countries were

particularly concerned by the need of technology transfer. Governments in the region have

created special incentives in order to attract FDI, hoping for technological upgrading and a

general boost in productivity. Since large amounts of public funds have been used in order to

attract FDI, it is essential for policymakers to properly evaluate the overall benefits from FDI

and to identify the specific conditions that maximise these benefits. If foreign affiliates were

not a consistent source of increased productivity, distinction between foreign and domestic

enterprises would have little scope in constructing public policies and may cause unnecessary

distortions in the allocation of resources. To the extent that FDI spillovers are limited to cer-

tain types of firms, it is essential for policymakers to encourage domestic firms to adopt those

precise characteristics that will foster foreign knowledge diffusion.

The literature identifies several channels for foreign knowledge diffusion, like imitation

behaviour, increased competition, labour mobility and vertical linkages. Nevertheless, these

channels are difficult to disentangle in an empirical setting and the literature has settled so far

to identify an overall net effect. Moreover, the implications of empirical studies for conven-

tional wisdom and for policy purposes are not well understood, essentially due to qualitatively

mixed results. The explanations for these mixed findings have often pointed to methodological

issues (G€

org and Strobl, 2005; Hanousek et al., 2011) and to the different absorptive capacity

of local firms (Blalock and Gertler, 2009). It is therefore difficult to formulate a priori expecta-

tion about the effect of FDI on indigenous firms and about the different channels at work.

The overall objective of our paper is hence to disentangle the role of the different spillover

channels in a transition country setting and to make some advancement with respect to the

©2015 John Wiley & Sons Ltd 1947

The World Economy (2016)

doi: 10.1111/twec.12335

The World Economy

existing empirical literature, which has treated the specific spillover mechanism as a black

box. To this end, we extend the traditional empirical framework by including two additional

channels, namely labour mobility and second-order backward spillovers. There is indeed sig-

nificant scope for investigating these types of spillovers in CEEC, as both the share of

employees working in foreign affiliates and the intensity of backward linkages are particularly

high (Giroud et al., 2012). Additionally, we separate horizontal spillovers into a com petition

effect, an imitation/demonstration effect and a labour mobility component. This is, to the best

of our knowledge, the first empirical study to identify the specific channels of FDI knowledge

spillovers. Finally, we seek to refine the role of firm heterogeneity in explaining FDI spil-

lovers, by investigating different features of absorptive capacity and the way they foster

knowledge acquisition. Relating absorptive capacity to the specific channels of knowledge

spillovers allows us to reveal some interesting insights as to the FDI effects on domestic

firms’ productivity.

Our results, using a large data set of Romanian firms over the period 1999–2007, are in

line with most of the literature on the transition countries. Overall, we find the position in the

supply chain to be crucial for capturing FDI spillovers, as local suppliers enjoy produc tivity

gains while clients suffer productivity losses. Additionally, these types of vertical spillo vers

seem rather robust to the presence of different features of absorptive capacity. We also show

that the benefits of supplier base upgrading are completely internalised by foreign affiliates

and other downstream firms are unable to reap productivity gains. Next, we find foreign com-

petition and imitation effects to be largely insignificant drivers of domestic firms’ productiv-

ity, while worker mobility appears to be the main channel of horizontal knowledge diffusion.

Finally, we show that the direction and the intensity of horizontal spillovers depend highly on

the absorptive capacity of domestic firms, and especially on human capital.

In order to develop these points, we have structured the paper as follows: Section 2 pre-

sents the main theoretical and empirical contributions on FDI technology spillovers, sum-

marising the conclusions of the existing literature. The methodology used to investigate the

different channels of productivity spillovers is presented in Section 3, together with the

description of the dataset. The results of our various estimations, as well as a discussion and

policy implications, are reported in Section 4. The final section of the paper highlights the

main conclusions.

2. LITERATURE REVIEW ON FDI SPILLOVERS

Foreign firms are thought to possess some form of specific asset (often knowledge) which

is productivity enhancing and enables them to enjoy higher efficiency compared with domes-

tic firms. To the extent that domestic firms manage to get access to this knowledge, their pro-

ductivity is also improved and a form of virtuous circle of efficiency spillovers is created.

This multiplier effect thus becomes the main argument when supporting the contribution of

FDI to the economic development of host countries (de Mello, 1997).

The literature identifies several channels through which local firms can get access to foreign

affiliates’ knowledge. Demonstration effects can ease local firms’ efforts to imitate the more

advanced production methods, especially through reverse engineering (Wang and Blomstrom,

1992). Market penetration by multinationals increases competition (Markusen and Venables,

1999), thereby inducing a crowding-out pressure and forcing local firms to adopt new tech-

nologies and improve efficiency (Glass and Saggi, 2002). Next, foreign affiliates can increase

demand addressed to local suppliers, favouring economies of scale and encouraging the

©2015 John Wiley & Sons Ltd

1948 C. JUDE