Max Planck Institute for Innovation and Competition, Munich, Room 313
We study the impact of foreign direct investment (FDI) on total factor productivity (TFP) of domestic ﬁrms using a new, representative ﬁrm-level data set spanning six countries. A novel ﬁnding is that ﬁrm-level spillovers from foreign ﬁrms to domestic companies can be signiﬁcantly positive, non-existent, or even negative, depending on which sectors receive FDI. When foreign ﬁrms produce in the same narrow sector as domestic ﬁrms, the latter are negatively affected by increasing competition and positively aﬀected by knowledge spillovers. We ﬁnd that the positive spillovers dominate if foreign ﬁrms enter sectors where ﬁrms are “technologically close,” controlling for the endogeneity of their entry decision into such sectors. Positive technology spillovers also affect ﬁrms in other sectors, if those sectors are technologically close to the sectors receiving FDI. Increasing FDI in sectors that are technologically close to other sectors boosts TFP of domestic ﬁrms by twice as much as increasing FDI by the same amount across all sectors.
Contact Person: Zhaoxin Pu