16 | BestPolicyPracticesforPromotingInwardandOutwardForeign Direct Investment—October 2010 In several studies, spillover efficiency benefits to host country firms seem to be larger when foreign ownership primarily takes the form of joint ventures with domestically owned firms. In other cases, spillover benefits are either larger, or no smaller, when foreign investors have dominant or wholly owned positions in host country firms. To the extent that foreign ownership limitations discourage FDI at the margin, the overall impact of such limitations on spillover efficiency benefits is likely to be negative, since discouraging FDI will indirectly limit potential (and actual) spillover efficiency benefits. productivity spillovers from Fdi are larger when foreign and domestically owned companies are located near each other . Does the concentration of industry matter for the quality of FDI? As discussed earlier in this report, economic theory is ambiguous concerning how industry attributes like concentration of ownership affect FDI spillovers. The empirical findings are also mixed. In some studies, spillover efficiency benefits are larger when domestic industries are more highly concentrated, and in other studies they are smaller. Geographic concentration does matter for the quality of FDI. When activities are located close to each other, there are more direct and indirect technology transfers between organizations. One would therefore expect FDI spillovers to be larger when foreign and domestically owned establishments are near each other. This is, indeed, a strong finding from the sample of empirical studies that we reviewed. 12 12 Few studies seek to identify whether the presence of foreignowned establishments has a stronger link to spillover benefits than the presence of domestically owned establishments. Debaere, Lee, and Paik (2010) find evidence from South Korean investment in China that geographic concentration has particularly strong beneficial impacts on spillovers when other Korean companies are located in the specific region. Conversely, Lileeva (2010) finds that U.S.-controlled and Canadian-controlled plants are both equally likely to benefit from productivity spillover deriving from new technology brought into Canada by FDI from the United States. Find this report and other Conference Board research at www .e-library .ca Several other potential factors that affect FDI quality are included in the empirical models we have reviewed, although the number of relevant studies is small. Again, we hesitate to draw any firm conclusions. The openness of the host economy to international trade is one such additional variable. Again, the expected empirical relationship is ambiguous. On the one hand, a relatively open economy might be expected to be relatively efficient and competitive, in which case domestic firms are more likely to have both the incentive and the capability to exploit new processes and techniques brought into the domestic economy through inward direct investment. On the other hand, in a relatively open economy, new processes and techniques might also be embodied in imports of capital equipment that would reduce the scope for spillovers to be tied to FDI. 13 As noted above, the available empirical evidence on the linkage between openness and FDI spillovers is limited, and what evidence is available is mixed. Finally, a few studies consider whether policies that affect the behaviour of foreign-owned affiliates influence the efficiency or innovation of host country firms. In particular, two studies consider whether more productivity spillovers flow from export-oriented foreign affiliates than from non-export-oriented foreign affiliates, and they differ in their findings. Specifically, one study finds FDI spillovers are mainly transmitted from export-oriented foreign affiliates to large domestic firms, 14 whereas a second finds no significant relationship between the export orientation of foreign-owned firms and domestic innovation. 15 A third study examines whether government programs requiring foreignowned firms to source from local suppliers promotes FDI spillovers, and finds no evidence that they do. 16 13 Keller and Yeaple (2009) examine technology spillovers to U.S. manufacturing firms from inward foreign direct investment and from imports. They find that the former are stronger than the latter, particularly in high-tech sectors. 14 Blyde, Kugler, and Stein, “Exporting Vs. Outsourcing by MNC Subsidiaries: Which Determines FDI Spillovers?” 18. 15 Cheung and Lin, “Spillover Effects of FDI on Innovation in China: Evidence From the Provincial Data,” 43. 16 Driffeld, “Regional Policyand Spillovers From FDI in the U.K,” 579-594.
Other reviews of the FDI spillover literature broadly support our qualitative assessment summarized in Table 7. For example, Görg and Greenaway also highlight findings that the absorptive capacity of domestic firms is a key factor determining whether domestic firms benefit from FDI spillovers, and that spillovers benefit companies in close proximity to foreign-owned affiliates. 17 The absorptive capacity of host economies is related to technological activities and the availability of skilled labour. They also note that what little work has been completed on trade-related investment measures has failed to establish a direct link between such measures and the transfer of useful technologies to domestically owned firms. One point of disagreement with our assessment is Görg and Greenaway’s assertion that economies with more open trade regimes benefit from FDI more than countries with inward-oriented regimes. There is no consistent evidence that Fdi spillover benefits will be larger if governments require investing companies to commit to activities that they would not otherwise find profitable . In summary, a strong absorptive capacity is likely to result in greater FDI spillover efficiency benefits. For developed countries such as Canada, this absorptive capacity includes the active performance of R&D and a strong innovative infrastructure. An important component of a strong innovative infrastructure is a skilled and relatively highly educated workforce. There is no consistent evidence to suggest that host governments can gain larger FDI spillover benefits by requiring foreign-owned affiliates to enter partnerships or joint-venture arrangements with domestically owned firms or to commit to activities that they would not otherwise find profitable. Examples of such activities might include local content or export target requirements. 17 Görg and Greenaway, “Much Ado About Nothing? Do Domestic Firms Really Benefit From Foreign Direct Investment?” 15. The Conference Board of Canada | 17 In short, the policy implications for the quality of FDI are roughly consistent with those for the magnitude of FDI. Namely, the focus of government policies should be on ensuring the efficient provisions of public goods such as education and physical infrastructure, and on promoting the technological capabilities of private firms and non-profit institutions, such as universities, that contribute indirectly to bolstering the absorptive capacity of domestic organizations. It is beyond the scope of this report to discuss government financial support for R&D and other innovationrelated activities. We merely note that the spillover efficiency benefits of FDI are larger when related industrial activities are near each other. Indeed, the literature suggests that as activities become more spread out, technological spillovers tend to decline dramatically. Therefore, deliberate efforts on the part of policy-makers to “spread out” industrial activity geographically, particularly activities characterized as science- and technology-intensive, are likely to weaken society’s overall technological capabilities. Our broad policy conclusions for making sure investments are of the best quality—i.e., result in the greatest productivity spillovers—are consistent with those of other researchers. For example, Fan highlights the roles that government policy can play by investing in infrastructure, educating, and training, and by encouraging domestic firms to invest in technology development. 18 Another study concludes that regions can improve both their access to and benefits from FDI by creating good physical and communications infrastructures, by cultivating a highly educated workforce, and by encouraging a high level of spending on R&D-related activities. 19 18 Fan, “Technological Spillovers From Foreign Direct Investment— A Survey,” 20. 19 Copenhagen Economics and Magnus Blomstrom, Study on FDI and Regional Development: Final Report, 5. Find this report and other Conference Board research at www .e-library .ca