Foreign direct investment in developing economies

Abstract

Purpose The aim of this study was to investigate how the productivity spillover effects of foreign direct investment (FDI) in the Latin American economies are manifested. Specifically, the paper sought to identify the role of foreign presence and government intervention through an industrial policy on total factor productivity in Latin American countries. Design/methodology/approach The analyses in this study were performed in two stages. The first step consisted of decomposing the total factor productivity growth, in technical efficiency change (EC) and technological efficiency change (TC), using the Malmquist Productivity Index (MPI). In the second stage of this research, the specific EC and TC indexes of each country – obtained with the MPI – are used alternately as a dependent variable in a regression analysis with dynamic panel data. The variables were collected from the World Development Indicators database, available in the World Bank database, and cover the period from 1994 to 2014. Findings FDI has contributed to not only the catch-up effect – i.e. to continuous improvements in production processes and products using the same technology – but also in terms of productivity, due to technological innovations and the frontier-shift effect. Industrial policies, such as the FDI attraction, when established in isolation, are not able to contribute to the generation of productivity spillovers, measured in terms of technical and technological efficiency. Research limitations/implications The limitation of the present study lies precisely in the nature of data aggregation that actually limits a more in-depth analysis of the object of study. The available data set for the analysis in this study does not provide a detailed examination of the domestic corporations’ characteristics, the sectors and motivations of multinational corporations of each one of the analyzed economies. Practical implications The outcomes of this research present several practical implications, as its development is based on the recognition that productivity is essential for the development of a country. It remains the Achilles' heel of the Latin American economies, and therefore, it is necessary and essential to move toward a change in its development model and, more specifically, in its industrial policies, with a focus on investment and innovation to achieve the new sustainable development objectives. Among the main challenges presented to governments in the region is the emergence of policies aimed at establishing a sustainable development path through industrial policies capable of accelerating productivity growth. Social implications The evidence presented in this study highlights the importance of better understanding the real effects of state intervention through the use of industrial policy instruments and how they affect foreigners’ investment decisions, as the lack of clear industrial policy orientation that is systematically integrated with MNEs’ operations may result in economic development opportunities below the ideal. Originality/value The research results corroborate the foundations of spillover effects theory and with the recognition that the intensity of the effect of the foreign participation on the performance of economies will depend on the absorption capacity of host economies.

FDI and Firm Productivity: A Comprehensive Review of Macroeconomic and Microeconomic Models

“…Productivity externalities consist of increases in the productivity of local firms because of foreign presence in the host economy (Bruhn et al 2020). Thus, productivity externalities arise not only from technological externalities but also from pecuniary externalities.…”

FDI, disinvestment and growth: an appraisal of Bhutanese economy

“…FDI benefits can be drawn in terms of technology transfer, exchange of skills and investment in terms of joint-venture projects. According to Bruhn et al (2020), FDI has contributed to continuous improvements, production processes, productivity and technological innovations. At times foreign portfolio investment and FDI are interchangeably used.…”

“…The trade openness, infrastructure availability and market size have played a significant role in attracting foreign investment in a country. Bruhn et al (2020), FDI has contributed to continuous improvements, production processes, productivity and technological innovations. At times foreign portfolio investment and FDI are interchangeably used.…”

Two-way knowledge spillovers in the presence of heterogeneous foreign subsidiaries: evidence from an emerging country

“…Foreign direct investment (FDI) could contribute to enhancing productivity externalities and the competitiveness of domestically-owned firms through the generation of knowledgespillover effects (Blomstr€ om and Kokko, 1998;Crespo and Fontoura, 2007;Bruhn et al, 2020;Zhang and Yang, 2022). Contrary to traditional assumptions in the literature, spillovers are not always easily achieved, because knowledge development and the transmission to a different context is frequently difficult and costly (Teece, 1977).…”

“…Foreign direct investment (FDI) could contribute to enhancing productivity externalities and the competitiveness of domestically-owned firms through the generation of knowledge-spillover effects (Blomström and Kokko, 1998; Crespo and Fontoura, 2007; Bruhn et al. , 2020; Zhang and Yang, 2022).…”