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Does Foreign Direct Investment Increase the Productivity of Domestic Firms : In Search of Spillovers through Backward Linkages

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dc.contributor.authorJavorcik, Beata
dc.date.accessioned2014-08-01T18:48:25Z
dc.date.available2014-08-01T18:48:25Z
dc.date.issued2002-10
dc.description.abstractMany countries compete against one another in attracting foreign investors by offering ever more generous incentive packages and justifying their actions with the productivity gains that are expected to accrue to domestic producers from knowledge externalities generated by foreign affiliates. Despite this being hugely important to public policy choices, there is little conclusive evidence indicating that domestic firms benefit from foreign presence in their sector. It is possible, though, that researchers have been looking for foreign direct investment (FDI) spillovers in the wrong place. Multinationals have an incentive to prevent information leakage that would enhance the performance of their local competitors in the same industry but at the same time may want to transfer knowledge to their local suppliers in other sectors. Spillovers from FDI may be, therefore, more likely to take place through backward linkages-that is, contacts between domestic suppliers of intermediate inputs and their multinational clients-and thus would not have been captured by the earlier literature. This paper focuses on the understudied issue of FDI spillovers through backward linkages and goes beyond existing studies by shedding some light on factors driving this phenomenon. It also improves over existing literature by addressing several econometric problems that may have biased the results of earlier research. Based on a firm-level panel data set from Lithuania, the estimation results are consistent with the existence of productivity spillovers. They suggest that a 10 percent increase in the foreign presence in downstream sectors is associated with 0.38 percent rise in output of each domestic firm in the supplying industry. The data indicate that these spillovers are not restricted geographically, since local firms seem to benefit from the operation of downstream foreign affiliates on their own, as well as in other regions. The results further show that greater productivity benefits are associated with domestic-market, rather than export-oriented, foreign affiliates. But no difference is detected between the effects of fully-owned foreign firms and those with joint domestic and foreign ownership. The findings of a positive correlation between productivity growth of domestic firms and the increase in multinational presence in downstream sectors should not, however, be interpreted as a call for subsidizing FDI. These results are consistent with the existence of knowledge spillovers from foreign affiliates to their local suppliers, but they may also be a result of increased competition in upstream sectors. While the former case would call for offering FDI incentive packages, it would not be the optimal policy in the latter. Certainly more research is needed to disentangle these two effects.en
dc.identifierhttp://documents.worldbank.org/curated/en/2002/10/2054540/foreign-direct-investment-increase-productivity-domestic-firms-search-spillovers-through-backward-linkages
dc.identifier.doi10.1596/1813-9450-2923
dc.identifier.urihttps://hdl.handle.net/10986/19210
dc.languageEnglish
dc.language.isoen_US
dc.publisherWorld Bank, Washington, DC
dc.relation.ispartofseriesPolicy Research Working Paper;No. 2923
dc.rightsCC BY 3.0 IGO
dc.rights.urihttp://creativecommons.org/licenses/by/3.0/igo/
dc.subjectACCOUNTING
dc.subjectAFFILIATES
dc.subjectAVERAGE PRODUCTIVITY
dc.subjectDEVELOPMENT INDICATORS
dc.subjectDOMESTIC FIRMS
dc.subjectDOMESTIC INDUSTRIES
dc.subjectDOMESTIC MARKET
dc.subjectDOMESTIC SUPPLIERS
dc.subjectECONOMIC REVIEW
dc.subjectEMPIRICAL EVIDENCE
dc.subjectEMPIRICAL STUDIES
dc.subjectEMPLOYMENT
dc.subjectEXTERNALITIES
dc.subjectFDI
dc.subjectFINANCIAL CONSTRAINTS
dc.subjectFINANCIAL SECTOR
dc.subjectFINANCIAL SUPPORT
dc.subjectFIRM SIZE
dc.subjectFOREIGN AFFILIATES
dc.subjectFOREIGN CAPITAL
dc.subjectFOREIGN COMPANIES
dc.subjectFOREIGN DIRECT INVESTMENT
dc.subjectFOREIGN EQUITY PARTICIPATION
dc.subjectFOREIGN EQUITY SHARE
dc.subjectFOREIGN FIRMS
dc.subjectFOREIGN INVESTMENT
dc.subjectFOREIGN INVESTORS
dc.subjectFOREIGN OWNERSHIP
dc.subjectFOREIGN PRESENCE
dc.subjectFOREIGN SUPPLIERS
dc.subjectGLOBAL MARKETS
dc.subjectHOST COUNTRY
dc.subjectIMPORT LIBERALIZATION
dc.subjectIMPORTED INPUTS
dc.subjectIMPORTS
dc.subjectINCREASING COMPETITION
dc.subjectINTELLECTUAL PROPERTY
dc.subjectINTERMEDIATE INPUTS
dc.subjectINTERMEDIATE PRODUCTS
dc.subjectINTERNATIONAL TRADE
dc.subjectINVENTORIES
dc.subjectKNOWLEDGE SPILLOVERS
dc.subjectLIQUIDATION
dc.subjectLOCAL FIRMS
dc.subjectLOCAL MARKET
dc.subjectLOCAL SUPPLIERS
dc.subjectMANUFACTURING FIRMS
dc.subjectMEDIUM-SIZED ENTERPRISES
dc.subjectNATIONAL TREATMENT
dc.subjectPOLICY MAKERS
dc.subjectPOLICY RESEARCH
dc.subjectPOSITIVE EXTERNALITIES
dc.subjectPOSITIVE SPILLOVERS
dc.subjectPRESENT VALUE
dc.subjectPRIVATIZATION
dc.subjectPRODUCERS
dc.subjectPRODUCTION PROCESS
dc.subjectPRODUCTIVITY
dc.subjectPRODUCTIVITY GROWTH
dc.subjectPRODUCTIVITY SPILLOVERS
dc.subjectPROFITABILITY
dc.subjectPUBLIC POLICY
dc.subjectSCALE ECONOMIES
dc.subjectSTANDARD ERRORS
dc.subjectTECHNICAL ASSISTANCE
dc.subjectTECHNICAL REQUIREMENTS
dc.subjectTECHNOLOGY SPILLOVERS
dc.subjectTECHNOLOGY TRANSFER
dc.subjectTRANSITION COUNTRIES
dc.subjectTRANSITION ECONOMIES
dc.subjectTRANSITION ECONOMY
dc.subjectTRANSPORT
dc.subjectTRANSPORT EQUIPMENT
dc.subjectVERTICAL LINKAGES
dc.titleDoes Foreign Direct Investment Increase the Productivity of Domestic Firms : In Search of Spillovers through Backward Linkagesen
dspace.entity.typePublication
okr.crossref.titleDoes Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages
okr.date.disclosure2002-10-31
okr.date.doiregistration2025-04-10T09:29:29.339449Z
okr.doctypePublications & Research::Policy Research Working Paper
okr.doctypePublications & Research
okr.docurlhttp://documents.worldbank.org/curated/en/2002/10/2054540/foreign-direct-investment-increase-productivity-domestic-firms-search-spillovers-through-backward-linkages
okr.globalpracticeGovernance
okr.globalpracticeHealth, Nutrition, and Population
okr.globalpracticeTrade and Competitiveness
okr.guid196171468772455993
okr.identifier.doi10.1596/1813-9450-2923
okr.identifier.externaldocumentum000094946_02111304010628
okr.identifier.internaldocumentum2054540
okr.identifier.reportWPS2923
okr.language.supporteden
okr.pdfurlhttp://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2002/11/22/000094946_02111304010628/Rendered/PDF/multi0page.pdfen
okr.region.administrativeEurope and Central Asia
okr.region.countryLithuania
okr.sectorIndustry and trade :: General industry and trade sector
okr.topicInternational Economics and Trade::Trade and Regional Integration
okr.topicInternational Economics and Trade::Foreign Direct Investment
okr.topicEconomic Theory and Research
okr.topicBanks and Banking Reform
okr.topicPublic Sector Development::Decentralization
okr.topicEnvironmental Economics and Policies
okr.topicHealth Economics and Finance
okr.topicHealth, Nutrition and Population
okr.unitTrade, Development Research Group
okr.volume1
relation.isSeriesOfPublication26e071dc-b0bf-409c-b982-df2970295c87
relation.isSeriesOfPublication.latestForDiscovery26e071dc-b0bf-409c-b982-df2970295c87
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