Trade Adjustment Costs in Developing Countries: - World Bank ...

234Beata S Javorcik7. FUTURE RESEARCHThe evidence presented in this note has several implications for the direction offuture research on the adjustment process taking place in the aftermath of FDI inflows.First, it suggests that the focus of the debate should shift from attempting togeneralize about whether or not FDI spillovers exist, to determining the conditionsunder which they are likely to be present, and investigating under what conditionstheir positive effect on indigenous firms’ performances will be dwarfed by the increasedcompetition resulting from foreign presence. 9 Examining the impact of FDIin the context of one country at a time is unlikely to be very productive. What isneeded is a multi-country study based on comparable high-quality, firm-level paneldata that could take into account host country characteristics. Conducting a metastudyfocusing on the host country business environment and level of developmentcould be another promising avenue for future research.Second, more effort should be directed at understanding the exact mechanismsbehind the observed patterns. Rather than correlating the performance of hostcountry firms with the presence of multinationals in their or other sectors, researchersshould look at the flows of workers between the two types of firms,identify domestic suppliers of foreign customers, consider the effect of foreignpresence on the entry of new firms and their characteristics, and ask firms detailedquestions about the sources of their innovation. Some researchers have alreadypursued this line of study, but more work is needed. While it creates new challengesin terms of finding appropriate econometric strategies, collecting data,and overcoming the fear of relying on surveys, this area of research probablyhas the greatest potential.Third, the scope of investigations should be extended to encompass the servicesector. Anecdotal evidence suggests that the movement of service industry professionalsto executive positions in other firms may also constitute an importantspillover channel to other service firms and to manufacturing industry. For instanceMcKendrick (1994) reports that local banks and financial institutions inLatin America and South Asia are filled with the ‘alumni’ of Citibank and BNP.Moreover, because the nature of the sector and trade barriers limit cross-bordertrade in services, opening service industries to foreign providers may confer largebenefits on downstream manufacturing. Of course, allowing entry of foreign servicesproviders without undertaking complementary reforms (competition, regulation)is unlikely to be productive. More research is certainly needed to assess theconditions under which a host country can maximize the benefits from FDI inservices.Beata Javorcik is a reader in economics at the University of Oxford and a CEPRResearch Affiliate.9 This is not to say that an increase in competition is not a desirable effect.