School of Economics and Finance

No. 452: Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?

Jonathan E. Haskel , Queen Mary, University of London
Sonia C. Pereira , University College London
Matthew J. Slaughter , Dartmouth College and NBER

February 1, 2002

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Are there productivity spillovers from FDI to domestic firms, and, if so, how much should host countries be willing to pay to attract FDI? To examine these questions we use a plant-level panel covering U.K. manufacturing from 1973 through 1992. Across a wide range of specifications, we estimate a significantly positive correlation between a domestic plant's TFP and the foreign-affiliate share of activity in that plant's industry. This is consistent with positive FDI spillovers. We do not generally find significant effects on plant TFP of the foreign-affiliate share of activity in that plant's region. Typical estimates suggest that a 10 percentage-point increase in foreign presence in a U.K. industry raises the TFP of that industry's domestic plants by about 0.5 percent. We also use these estimates to calculate the per-job value of these spillovers. These calculated values appear to be less than per-job incentives governments have granted in recent high-profile cases, in some cases several times less.

J.E.L classification codes: F2, L1

Keywords:Multinational firms, Foreign direct investment, Productivity spillovers