learning and spillovers from FDI (Kumar and Agarwal, 2000). There is an
important question here. Do joint ventures or wholly-owned foreign
subsidiaries exhibit higher levels of productivity growth than local firms and is
there is there any evidence of spillovers to local firms occurring from these
foreign entrants? There is a significant problem with answering these ques-
tions. If FDI is attracted towards industries that are already successful then any
observed correlation between the presence of foreign firms and the productiv-
ity of domestically owned firms will overstate the positive impact of FDI. One
study (Aitken and Harrison, 1999) using annual survey data on more than
4,000 Venezuelan firms between 1976 and 1989 found (i) a positive relation-
ship between increased foreign equity participation and subsequent firm
performance; (ii) that FDI was attracted to higher-productivity sectors; and
(iii) that productivity in other domestically owned plants seemed to fall as FDI
entered a sector. This negative spillover the authors interpreted as being due to
domestic firms losing market share to foreign firms. The net effect though was
very small. Although these results show that there can be benefits from FDI,
there is no evidence supporting technology spillover from foreign firms to
domestically owned ones.
Other studies,however, have found evidence of positive spillovers. MNCs
in Taiwan created substantial backward linkages to local components suppliers
or assembly services in personal computers,sewing machines, sports shoes
and bicycles. Growth of component and other intermediate-goods producers in
turn created a forward linkage to final-goods producers, drawing in both more
MNCs and more domestically owned firms (Hobday, 1995). A famous exam-
ple of FDI as a dynamic catalyst in promoting rapid industrialization is that of
Bangladeshi textiles in the late 1970s (Box 5.1).
It is clear that the impact of FDI depends on the circumstances of the partic-
ular case. This means that government policy has an important role in maxi-
mizing the net benefits FDI to host countries. Policy needs to go beyond
simply opening up a country to FDI and keeping governmental fingers crossed
that all goes well. Studies have found that the magnitude of positive spillovers
depends on local endowments of education and skills, the technological capa-
bility of local firms and the quality of infrastructure (Lall, 1992; Pantibala and
Pedersen, 2002; Gorg and Greenaway, 2004; Li and Liu, 2005). A study of the
determinants of the local content ratio (value of locally sourced inputs and raw
materials to total sales) of 272 Japanese electronics manufacturing affiliates in
24 countries found that the local content is positively affected by the quality of
infrastructure and by joint ventures between the Japanese-owned and domes-
tic firms (Delderbos et al.,2001).
The state also has a potentially more strategic role. A government industrial
policy that targets particular types of technology with subsidies or other forms
of support can promote technological transfer and domestic learning. Higher-
end technologies such as R&D investment generate more spillovers than low-
end operations such as data-entry and call centres (Pantibala and Pedersen,
2002). Enforcing an export obligation on FDI is also important. FDI attracted
114 Sources of Growth in the Modern World Economy since 1950