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Abstract ▼ AI-Helper

This study analyzes the dynamic effect of FDI onlocal firms’productivity by relaxing the standard implicit assumptiorn that technological spillovers are immediate and permanent. We find that the entry of majority foreign owned firms has a short run negative effect on the productivity of local comp...

This study analyzes the dynamic effect of FDI onlocal firms’productivity by relaxing the standard implicit assumptiorn that technological spillovers are immediate and permanent. We find that the entry of majority foreign owned firms has a short run negative effect on the productivity of local competitors, which is more than offset by a longer run positive effect. The entry of minority foreign owned firms has an immediate, though short-lived, positive effect on local suppliers through backward linkages. The entry of majority foreign owned firms also improves the productivity of local suppliers, but the effect materializes later and lasts longer. This paper uses firm level data to examine how technology spillover through FDI affect the productivity of domestic firm in Korea. We advance the understanding as to when, where and under what condition FDI generate technology spillover domestic firm. The main focus of the paper is to address the question on whether FDI generates spillover that benefit domestic firms in the host economy. The empirical analysis shows that based on the full sample, productivity spillover take place horizontally from MNCs to domestic firms within the same industry. However, the positive relationship loses its significance when the estimation is based on the sample of domestic firms. There is no evidence that productivity or employment spillover take place between foreign and domestic firms either through backward linkages or through forward linkages. This paper distinguishes between horizontal spillover and vertical spillover, and examines the impact of characteristics of country and of domestic firms on the strength of horizontal and vertical spillover and on the types of FDI. To improve the competitiveness of domestic parts and suppliers and strengthen their linkages with foreign affiliates, the government need to adopt a compressive approach. Though these results may be attributed partly to the data aggregation another limitations of the data set, these are consistent with the present condition of the manufacturing industry characterized by the weakness of forward and backward linkages between firms.

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