Much ado about nothing? Do domestic firms really benefit from foreign direct investment? Holger Görg and David Greenaway Leverhulme Centre for Research on Globalisation and Economic Policy, University of Nottingham

Introduction FDI is perhaps the most visible driver of globalisation Annual FDI flows exceed US$ 700bn; stocks exceed US$ 6 trillion Host governments provide generous investment incentives to attract FDI Motivation is the assumption of positive spillovers to the host country resulting in, e.g., productivity or export growth

What does the theory tell us? Multinationals possess technological advantage vis-à-vis domestic firms Transmission channels for spillovers –Imitation –Movement of Human Capital –Exports –Competition (possibly negative) Importance of host country characteristics –Relative Backwardness –Absorptive Capacity

What does the evidence tell us? Productivity Spillovers I Usual framework: Prod i,j = f(X i,j, foreign presence j ) Firm (plant) vs industry level data Cross section vs panel data Large literature has developed since 1970s Survey 35 papers - 15 developing, 14 developed, 6 transition 15 papers find positive spillovers, BUT of those use cross section data

What does the evidence tell us? Productivity Spillovers II Most reliable evidence points to no or negative spillovers Competition between multinationals and domestic firms reduces productivity Multinationals successfully prevent leakage of their technological advantages Spillovers benefit only certain groups of firms –Absorptive capacity –Trade regime

What does the evidence tell us? Wage Spillovers Does the presence of multinationals lead to higher wages? Wage spillovers through productivity spillovers or competition for labour Usual approach: w i,j = f(X i,j, foreign presence j ) Relatively few papers on wage spillovers Evidence for positive effects only in cross section estimations Little evidence for positive spillovers

What does the evidence tell us? Export spillovers Do multinationals dissipate knowledge of export markets to domestic firms? Domestic firms can be affected through –export information externalities –demonstration effects –competition on home and foreign markets Survey four studies; two find positive effects (UK and Mexico); two are inconclusive (Spain and Uruguay)

Is there a role for policy? Policies to influence the level and composition of FDI –trade policy –investment incentives –TRIMs –local infrastructure –supply of skilled labour Policies to maximise potential for spillovers –General policies aimed at changing the environment within which multinationals operate –Specific policies targeted at encouraging spillovers

Conclusions FDI is a key driver of economic growth and development Governments actively attract FDI because of a potential for spillovers to domestic firms Theory supports the idea of spillovers Evidence in support of spillovers is limited; need for more research using proper data and techniques General policies seem more appropriate than specific policies aimed at particular investments