Transmission channels matter: Identifying spillovers from FDI

Abstract

The empirical literature on the spillovers of foreign direct investment (FDI) has so far not analysed the well-established theoretical transmission channels through which FDI impacts on domestic firms. This paper shows how channels of transmission matter for productivity spillovers from FDI by providing more fuller and nuanced picture of the effects. We analyse a panel of eight sub-Saharan Africa countries spanning the period 2006-2014 and demonstrate the empirical relevance of distinguishing three channelsdemonstration, labour mobility, and competition. We provide measures of these effects and also show that the size, significance, and sign of spillover effects depend on the local absorptive capacity, technology levels, geographical proximity, and foreign ownership structure. Overall, results suggest that demonstration spillovers are large and economically significant, whereas the patterns of labour mobility and competition spillovers are not stable across the various specifications and measures. Finally, the analysis involves several measures of further investigations and robustness checks. Results are robust to the construction of spillover and outcome variables, the introduction of additional explanatory variables and an alternative estimation method.

How Domestic Firms Benefit from the Presence of Multinational Enterprises: Evidence from Indonesia and Philippines

“…To test the second hypothesis, domestic firms in the two countries were divided into firms with high absorptive capacity and low absorptive capacity, and the effect of the independent variables on the dependent variable was examined again. The absorptive capacity was measured by the ratio of average labor productivity of the MNEs in the industry to the domestic firms' labor productivity, consistent with Ben Hamida (2011) and Demena and Murshed (2018). A lower ratio corresponds with high absorptive capacity of a domestic firm.…”

“…Driffield (2001) used data obtained from the UK Office of National Statistics in 1989 and 1992 to test the impact of foreign direct investment (FDI) on domestic productivity. Demena and Murshed (2018) used World Bank Enterprise Survey data for 2006 and 2014 to examine technology spillover in eight sub-Saharan Africa countries. According to Duncan (2015), a panel data may differ in the interval between rounds of data collection and the length of the survey.…”

“…Technology spillover through worker mobility is represented by the interaction term FP*HC between the share of foreign presence and the firm's human capital. This interaction between foreign presence and human capital has been used as the proxy for worker mobility in studies by Ben Hamida (2011); Demena and Murshed (2018) and Orlic et al (2018). The interaction term measures the combined effect of the presence of foreign firms in an industry and level of human capital on domestic firms' productivity.…”

Foreign Direct Investment, Human Capital and Economic Growth in Africa: A Panel Threshold Regression Approach

“…The contribution of Foreign Direct Investment (FDI) to physical capital accumulation alone can hardly present the entire picture of how FDI affects economic growth in the host country. Literature provides substantial evidence in that the participation of foreign investors in the FDIreceiving firms and the role of multinational enterprises (MNEs) in creating employment are accompanied by the transfer of expertise and production know-how to the host country's stock of human capital (Demena and Murshed, 2018). Likewise, the emphasis on human capital development as a vital economic growth engine can be traced from the pioneering work of Romer (1986).…”

“…Irrespective of the differences in sample and the nature of FDI data used, all these studies concur in that the contribution of FDI on growth through human capital development can only be realized in countries where the quality of human capital stock is above a certain threshold level. Demena and Murshed (2018) also assert that effective and efficient absorption of knowledge from foreign investors is hypothesized to depend on the existing capacity of human capital stock in the host country. In line with these views, this study is attempted based on two major aspects.…”