Best Policy Practices for Promoting Inward and Outward Foreign ...

Best Policy Practices for Promoting Inward and Outward Foreign ...

Table 7

Factors That Determine the Degree to Which FDI or

FDO Has Spillover Productivity Benefits

variable impact

R&D Strongly positive

Education and skill level Weakly positive

Linkages to foreign affiliates Mixed

Domestic competition Mixed

Geographic density Strongly positive

Export orientation Mixed

Openness of economy n.a.

Regulation of foreign affiliates n.a.

Note: “Mixed” means that the positive and negative results for

the variable in question were about equal in number, and/or

the majority of the results for the variable in question were not

statistically significant; “n.a.” indicates only a small number of

studies reported results for the variable in question, such that no

reliable inferences about the variable could be drawn.

Source: Steven Globerman and Victor Zitian Chen.

what determines the quality of outward investments.

Only a handful of statistical studies look at the factors

that affect the quality of outward investments, and the

evidence is mixed. Specifically, there is no consistent

evidence of spillover benefits from FDO. 10 We therefore

focus on what affects the quality of inward direct


The primary focus of empirical studies of FDI quality

or spillover benefits is the absorptive capacity of host

country firms. The level of research and development

activity in the host country or among host country firms

is the most frequently specified measure of absorptive

capacity. The findings are unequivocal: R&D activity is

positively related to spillover efficiency benefits from

FDI (the estimated coefficients for the specific measures

10 See Zhao, Liu, and Zhao (2010), Iyer, Rambaldi and Tang (2008),

Singh (2007), Vahter and Masso (2007), and Braconier, Ekholm,

and Knarvik (2001). The potential economic benefits of FDO to the

home country are broader than just spillover benefits. Hence, one

should not conclude that FDO has no net economic benefits to

home countries.

The Conference Board of Canada | 15

used are uniformly statistically significant). It is certainly

possible to interpret measures of R&D activity as

broad indicators of scientific and technical activity in

the host economy, since R&D activity is highly correlated

with other indicators, such as patenting activity

and employment rates for scientists and engineers. In

fact, a number of studies specify absorptive capacity

using other variables besides R&D activeness. In particular,

measures of the education and skill level of the

domestic workforce, as well as the export orientation of

the host country work force, have been used. 11 Variables

measuring the education and skill level of the host

country workforce tend to be positively related to spillover

efficiency benefits from FDI, although the results

tend to be weaker than when absorptive capacity is

measured as R&D activeness. Specifically, the workforce

quality variable is sometimes statistically insignificant.

Empirical results for export orientation are distinctly

mixed. That is, in several cases, export orientation is

positively related to spillovers, while in other cases it is

either negatively related to spillovers or the estimated

relationship is statistically insignificant. A possible

explanation for the mixed results is that in some cases,

particularly when the host countries are emerging economies,

export orientation identifies labour-intensive

industries with relatively limited capabilities to adopt

relatively new production and managerial processes.

A number of available studies consider the empirical

relationship between FDI spillover benefits and the

nature of foreign ownership. In particular, they evaluate

whether the extent of foreign ownership is related to the

magnitude of spillover benefits. For example, several

studies consider whether FDI spillover benefits in a

sample of host country firms are larger when foreign

investment takes the form of joint ventures or minority

ownership than when it takes the form of majority or

wholly owned affiliates. These findings, which hold

obvious policy importance for foreign ownership

restrictions, can be prudently described as being mixed.

11 The presumption is that export-oriented firms are likely to be

relatively efficient compared with domestic firms that focus exclusively

on serving the local market, since the former must compete

against world-class competitors in foreign markets.

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