Foreign direct investment, host country characteristics and spillovers

University dissertation from Stockholm : Economic Research Institute, Stockholm School of Economics [Ekonomiska forskningsinstitutet vid Handelshögsk.] (EFI)

Abstract: It has been argued that technology and productivity spillovers from foreign direct investment are the most important channels for the diffusion of modern technology to locally-owned firms in the MNCs’ host countries. Yet, existing empirical studies differ in their appraisals of the size and significance of spillovers. In this dissertation, we examine the technology imports of U.S. multinationals in 33 host countries, and more detailed information on foreign direct investment in Mexican manufacturing in 1970 and 1975, and propose – unlike earlier studies – that spillovers are not only exogenous effects of foreign presence, but also functions of various host country characteristics.We argue that the potential for spillovers from imitation of MNC technology depends on the technology imports of MNC affiliates – these, in turn, seem to be determined by factors such as the host country’s technological capability, the presence of technology transfer requirements, and the level of competition facing the affiliate. Some of the variables also appear to influence the local firms’ abilities and ambitions to imitate MNC technology. In addition, the effects of MNC presence on the level of competition (and the spillovers that occur when local firms are forced to become more efficient in order to maintain profits and market shares) are probably endogenously determined by the behavior of foreign affiliates and local firms: the two types of firms co-exist peacefully in some countries and industries, but compete fiercely in other locations. Consequently, spillovers may be important or insignificant depending on the characteristics of the host country. It is also possible that host country policies have some impact on spillovers.