Which Foreigners Are Worth Wooing? A Meta-Analysis of Vertical Spillovers from FDI

During the GDNet Awards and Medals Finalists Communications training that took place on the 11-12 January, 2010 participants were asked to write a blog to capture the key issues underpinning their work.

The following blog post is by Tomáš Havránek.

Developing and transition countries try to attract foreign investors. Some give them money, some give them tax incentives. And the most important reason behind these subsidies is that policy-makers believe that FDI has positive effects on domestic firms. Recently, researchers in this area have been focusing especially on knowledge transfer from foreign investors to their local suppliers.

I became interested in the topic of knowledge transfer while, during my studies, I was working as an assistant at a printing house in Eastern Bohemia, Czech Republic. I saw how the company benefited from the pressure on quality and speed of delivery imposed by foreign firms, and how this pressure made the company more competitive compared to other firms in a post-communist economy.

Since 2000, more than 100 development researchers have examined these effects empirically, but their results vary greatly. An efficient way how to make the most of this work is to collect all reported estimates and examine them quantitatively: the method is called meta-analysis.  We collected more than 3,500 estimates from 57 studies and tried to find the effect of foreign investment and knowledge transfer evident in these studies. We also explored how the characteristics of host countries and foreign investors shaped the results.

Our findings suggest that the underlying impact of FDI on domestic suppliers is positive and significant, amounting to an 11% increase in domestic productivity following a 10-percentage-point increase in foreign presence. The greatest benefits are received by host countries that are open to international trade and that have underdeveloped financial systems. The greatest benefits are generated by investors coming from far-off countries that are not excessively more developed than the host country. Such investors are most worth attracting: they will arguably use more local inputs because importing from their home country is costly and the quality of local inputs is sufficient.

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