What variables and methods should be taken into account in FDI spillover analysis

What is it about?

Empirical analyses of knowledge spillovers from foreign direct investment (FDI) offer mixed results; they find positive, neutral and negative FDI spillover effects. This lack of evidence mainly comes from the results of firm-level panel data analysis. This is important since this approach seems to be the most appropriate for estimating FDI spillovers. The paper takes a look at recent substantive and methodological developments in FDI spillover analysis, which have brought some more optimistic results with regard to FDI spillovers, and can help in further development in this field. The main substantive development relates to the introduction of a broad variety of sources of firm heterogeneity (foreign affiliates as well as local firms) in the analysis. Others include differentiation between vertical (inter-industry) and horizontal (intra-industry) spillovers, and host country absorptive capacity for knowledge spillovers. Methodological developments relate to distinguishing between technological/knowledge and productivity spillovers, improvement of modelling and estimation methods, and an increased amount and quality of data.

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Why is it important?

The paper represents an overview of the determinants and methodological issues related to FDI spillovers that should be taken into account in any analysis of the subject.