Technology or Competitiveness Gap? Reassessing Spillovers from Foreign Direct Investment

This paper analyzes the relationship between inward foreign direct investment (FDI) and the host country’s productivity using industry-level data from ten developed economies in 1987-2003. Questioning the focus of existing studies on technology and R&D spillovers from foreign to domestic firms, my theoretical framework extends the concept of “technology gap ” (between foreign and domestic firms). I introduce the concept of “competitiveness gap”, building on research documenting that productivity is driven not only by R&D but also other sources of competitive advantage (e.g. computerized information, management competencies, brand equity and human capital). I explain why FDI will have a positive impact on productivity growth in industries where the “competitiveness gap ” between foreign and local firms is relatively small. I find that FDI drives OECD productivity growth mostly in industries with high firm-specific advantages including (but not only) R&D while R&D interacted with FDI do not explain OECD industry productivity growth. The findings suggest that firms in industries hoping to benefit from FDI need to develop intangible assets beyond R&D