Understanding FDI spillover mechanisms.

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Foreign direct investment (FDI) has been praised as an important development tool, especially for countries at low levels of industrial development. Attracting multinational enterprises (MNEs) is seen as a means of introducing high-capability firms into low-capability industrial settings, and, given an implicit assumption of automated diffusion mechanisms, the idea is that advanced production technology, managerial knowledge, and working practices will be transferred from foreign investors to local firms, boosting the productivity of local producers. Since the prospective benefit of increased FDI to the host economy will depend in part on the extent to which technical knowledge and working practices held by higher capability MNEs are transmitted to local firms, the L2C project has sought to gain a deeper understanding of the transmission mechanisms that help create productivity gains for local firms. Moreover, the L2C research program has looked at several of such "automatic transfer mechanisms" and found them to be policy and context specific, emphasizing that care should be taken when evaluating the replicability of the Asian FDI/export-led industrialization process in an African context.

Until now our knowledge about capabilities diffusion has been generated from either case studies of direct effects (specific identifiable firm-to-firm knowledge transfers) or econometric analyses of more indirect "spillover effects" from FDI, where statistical associations between increased presence of MNEs and productivity improvements in local domestic firms are interpreted as a result of technology transfers from foreign affiliates to domestic firms. The latter studies of FDI externalities often emphasize the positive productivity spillovers via vertical linkages--i.e., from foreign firms to domestic suppliers (backward linkages) and from foreign suppliers to domestic firms (forward linkages). Generally, so-called horizontal spillovers from MNEs to domestic firms within the same industry are not easily observed. This is not altogether surprising, as MNEs have no incentive to transfer capabilities to competing enterprises, while they often benefit from improvements in the capabilities of suppliers or customers.

The case studies of direct effects and econometric studies of indirect effects are seldom combined. Maybe because both approaches point in the same direction; buyer-seller relationships along the value chain are effective ways to transfer both...

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