To share or not to share: Does local participation matter for spillovers from foreign direct investment?

Abstract

This study hypothesizes that the ownership structure in foreign investment projects affects the extent of vertical and horizontal spillovers from foreign direct investment (FDI) for two reasons. First, affiliates with joint domestic and foreign ownership may face lower costs of finding local suppliers of intermediates and thus may be more likely to engage in local sourcing than wholly owned foreign subsidiaries. This in turn may lead to higher productivity spillovers to local producers in the supplying sectors (vertical spillovers). Second, the fact that multinationals tend to transfer less sophisticated technologies to their partially owned affiliates than to wholly owned subsidiaries, combined with the better access to knowledge through the participation of the local shareholder in partially owned projects, may facilitate more knowledge absorption by local firms in the same sector (horizontal spillovers). The analysis based on a Romanian firm-level data set produces evidence consistent with these hypotheses. The results suggest that vertical spillovers are associated with projects with shared domestic and foreign ownership but not with fully owned foreign subsidiaries. They also indicate that the negative competition effect of FDI inflows is lower in the case of partially owned foreign investments as it is mitigated by larger knowledge dissipation within the sector.

Collecting the Pieces of the FDI Knowledge Spillovers Puzzle

“…First, empirical work too often ignores the conceptually important distinction between intentional knowledge transfers and unintentional knowledge spillovers. As Blalock andGertler (2007, 2008) and Javorcik and Spatareanu (2005) clearly show, many of the estimated effects are more likely related to knowledge transfer than knowledge spillover. From a policy perspective this distinction is very important: whereas the existence of knowledge spillovers (which are externalities) clearly warrants interventionist government policy, the existence of knowledge transfer (which takes place through market mechanisms) clearly does not.…”

“…Javorcik (2004b) analyzes knowledge spillovers from multinational enterprises through backward and forward linkages in a panel of about 4,000 Lithuanian firms. She finds evidence of positive knowledge spillovers through backward but 1996 -2000 Positive effects through backward linkages; no effects through forward linkages Javorcik and Spatareanu (2008) 13,129 firms in Romania, 1998Romania, -2003 Positive effects through backward linkages Kugler (2006) All manufacturing plants in Colombia, 1974Colombia, -1998 Positive effects through backward linkages; no effects through forward linkages Bwalya (2006) 125 Schoors and van der Tol (2002) find evidence of positive knowledge spillovers through backward linkages in Hungary but negative spillovers through forward linkages. Moreover, they find that these intersectoral effects are statistically more important than the intrasectoral effect (b 1 ).…”

“…Indeed, in a study of more than 100,000 Indonesian manufacturing establishments, Blalock and Gertler (2008) refer to the evidence they find of local firm productivity increases through vertical linkages with multinational enterprises as knowledge transfers rather than spillovers. Javorcik and Spatareanu (2005) use survey data on the perceptions of managers in local Latvian and Czech firms. They find that intentional multinational enterprise assistance is an important factor influencing local firms' productivity.…”

“…She finds no evidence of horizontal or forward knowledge spillovers or statistical differences between the effects of minority and majority FDI. Javorcik and Spatareanu (2008) analyze a panel of 13,129 Romanian firms. They find that shared foreign and domestic ownership induces positive vertical spillovers and negative horizontal spillovers.…”

“…Horizontal FDI is usually motivated by market-seeking incentives, vertical FDI by efficiency-or resource-seeking incentives, and export-platform FDI by the desire to find an efficient location from which to more profitably export to third countries. The extent of knowledge spillovers from these types of FDI may differ (Javorcik and Spatareanu 2005;Driffield and Love 2007;Beugelsdijk, Smeets, and Zwinkels forthcoming). Protsenko (2003) examines the spillover effects of horizontal and vertical German FDI in the Czech Republic.…”