Quality of Foreign Direct Investment, Knowledge Spillovers and Host Country Productivity: A Framework of Analysis

Pradhan, Jaya Prakash (2006): Quality of Foreign Direct Investment, Knowledge Spillovers and Host Country Productivity: A Framework of Analysis.

Abstract

The existing research on knowledge‐spillovers from foreign direct investment (FDI) has invariably treated all foreign firms as homogeneous and of equal importance for the development of host countries. However, in actual market situations foreign firms are basically non‐homogeneous and of varying qualities as far as the potential for knowledge‐spillover are concerned. Foreign firms differ in terms of export‐orientation, intensity to undertake local R&D activities, vertical integration, generating demands for local raw materials, and entry modes. Non‐inclusion of such quality dimensions of FDI into the spillover analysis is certainly an important limitation of the existing literature. This paper has explored different notion of FDI quality and argued that it should be included in the empirical studies on spillover analysis. This paper has develop an empirical framework for inclusion of quality dimensions in exploring FDI related spillovers on host country productivity and propose a percentile criterion to distinguish between low and high quality FDI firms in empirical exercises. Since there are several dimensions of FDI quality, the study suggest that the researchers can utilize the principal component analysis (PCA) to build a composite quality index to define low and high quality FDI firms. The empirical exercise on the construction of FDI quality index and related spillover variables for the Indian manufacturing sector shows that there are considerable differences exists between the spillovers variables associated with high and low quality FDI firms. This difference is more pronounced at individual industries level. Unless the differences that are present across foreign firms in terms of quality are brought into the spillover analysis, the obtained results are likely to give misleading conclusions.

• Item Type: MPRA Paper
• Language: English
• Keywords: FDI Quality; Knowledge‐Spillover
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business

References

Aitken, B., Hanson G. H. and Harrison A. E. 1997), ‘Spillovers, Foreign Investment, and Export Behavior’, Journal of International Economics, 43, pp. 103–132.

Aitken, B. and Harrison A. E. (1999), ‘Do Domestic Firms Benefit from Direct Foreign Investment?’ American Economic Review, 89(3): 605–618.

Blomstrom, M. and Perssion, H. (1983), ‘Foreign Investment and Spillover Efficiency in an Underdeveloped Economy: Evidence from the Mexican Manufacturing Industry’, World Development, 11, pp. 493–501.

Calderón, C, Loayza N. and Servén L. (2002), ‘Greenfield FDI vs. Mergers and Acquisitions: Does the Distinction Matter?’, CBC Working Papers, No.173, Central Bank of Chile.

Cantwell, J. and Janne, O. (1999), ‘Technological globalization and innovative centres: the role of corporate technological leadership and locational hierarchy’, Research Policy, 28, pp. 119–144.

Caves, R. E. (1974), ‘Multinational Firms, Competition and Productivity in Host Country Markets’, Economica, 41, pp.176–93.

Dunteman, G.H. (1989), Principal Components Analysis, Sage Publications, Newbury Park, CA.

Dutt, A.K., (1997), ‘The Pattern of Foreign Direct Investment and Economic Growth’, World Development, Vol. 25, No.11.

Fan, E.X. (2002), ‘Technological Spillovers from Foreign Direct Investment—A Survey’, ERD Working Paper No. 33, Asian Development Bank, Philippines.

Globerman, S. (1979), ‘Foreign Direct Investment and ‘Spillover’ Efficiency Benefits in Canadian Manufacturing Industries’, Canadian Journal of Economics, 12, pp. 42–56.

Gorg, H. and Greenaway, D. (2004), ‘Much ado about nothing? Do domestic firms really benefit from foreign direct investment?’, World Bank Research Observer, 19, pp.171–197.

Haddad, M. and Harrison, A. (1993), ‘Are there Positive Spillovers from Direct Foreign Investment? Evidence from Panel Data for Morocco’, Journal of Development Economics, 42, pp. 51–74.

Kathuria, V. (2000), ‘Productivity Spillovers from Technology Transfer to Indian Manufacturing Firms’, Journal of International Development, 12, pp. 343–369.

Kokko, A (1994), ‘Technology, Market Characteristics and Spillovers’, Journal of Development Economics, 43: 279–293.

Kokko, A, Zejan, M. C. and Tansini, R. (2001), ‘Trade Regimes and Spillover Effects of FDI: Evidence from Uruguay’, Welwirtschaftliches Archiv, 137, Pp. 124–149.

Kokko, A, Tansini Ruben and Mario C. Zejan (1996), ‘Local Technological Capability and Productivity Spillovers from FDI in the Uruguayan Manufacturing Sector’, Journal of Development Studies, 32, pp. 602–611.

Kumar, N. (2002), Globalization and the Quality of Foreign Direct Investment, New Delhi: Oxford University Press.

Kumar, N. and Pradhan, J. P. (2003), ‘Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends’, CMDR Monograph Series, No. 42, The Centre for Multidisciplinary Development Research, Dharwad, India.

Marin, A. and Bell, M. (2006), ‘Technology Spillovers from Foreign Direct Investment FDI: An Exploration of the Active Role of MNC Subsidiaries in the Case of Argentina in the 1990s’, Journal of Development Studies, 42, pp. 678–697.

Markusen, J. R., and Venables, A. J. (1999), ‘Foreign direct investment as a catalyst for industrial development’, European Economic Review, 43, pp. 335–356.

Moran, T. H. (1998), Foreign Direct Investment and Development, Washington, DC: Institute for International Economics.

Moran, T. H. (2001), ‘Parental Supervision: the new paradigm for foreign direct investment and development’, Washington, DC: Institute for International Economics.

Patel, P. and Vega, M. (1999), ‘Patterns of internationalization of corporate technology: location vs. home country advantages’, Research Policy, 28, pp.145–155.

Pradhan, J. P, Das K. and Paul M. (2006), ‘Export-orientation of Foreign Manufacturing Affiliates in India: Factors, Tendencies and Implications’, ISID Working Paper, No. 2006/08, Institute for Studies in Industrial Development, New Delhi.

Pradhan, J. P.(2002), FDI Spillovers and Local Productivity Growth: Evidence from Indian pharmaceutical industry’, Artha Vijnana, Vol. XLIV, pp. 317–332.

Pradhan, J. P, and Abraham, V. (2005), ‘Attracting Export‐Oriented FDI: Can India Win the Race?’, GIDR Working Paper, No. 156, Gujarat Institute of Development Research, Ahmedabad.

Rodriguez‐Clare, A. (1996), ‘Multinationals, Linkages, and Economic Development’, American Economic Review, 86, pp. 852–873.

Singer, H.W. (1950), ‘The Distribution of Gains between Investing and Borrowing Countries’, American Economic Review, Papers and Proceedings, 2, pp. 473–485.

UNCTAD (2000), World Investment Report 2000, United Nations, Geneva.

UNCTAD (2002), World Investment Report 2002, United Nations, Geneva.

UNCTAD (2004), Foreign Direct Investment and Performance Requirements: New Evidence from Selected Countries, United Nations, New York.

UNCTAD (2005), Economic Development in Africa: Rethinking the Role of Foreign Direct Investment, United Nations, Geneva.

UNCTAD(2005), World Investment Report 2005, United Nations, Geneva.

Wang, M. G. and Wong, M. C. S. (2004), ‘What Drives Economic Growth? The Case of Cross- Border M&A and Greenfield FDI Activities’. Available at SSRN: http://ssrn.com/abstract=627663.

Xu, B. (2000), ‘Multinational enterprises, technology diffusion, and host country productivity growth’, Journal of Development Economics, 62: 477–493.