Collecting the Pieces of the FDI Knowledge Spillovers Puzzle

Abstract

Recent surveys of the empirical literature have concluded that the evidence is mixed on the magnitude, direction, and even existence of knowledge spillovers from foreign direct investment (FDI). This article reviews the recent theoretical and empirical literature that responds to these inconclusive results and considers three main issues: spillover channels, mediating factors, and FDI heterogeneity. Studies that take into account individual spillover channels find robust evidence of knowledge spillovers from FDI. Studies on the importance of mediating factors and FDI heterogeneity are less conclusive and could benefit from greater convergence in methodologies and greater specificity in the spillover channels of interest. More generally, many studies do not properly distinguish between knowledge spillovers and knowledge transfers, and empirical studies seem to greatly outnumber theoretical studies. JEL codes: F23, O33In the face of difficulties associated with capturing spillover effects and the multitude of factors that can influence the extent of spillovers in each economy, we caution researchers about drawing generalized conclusions about the existence of externalities associated with [foreign direct investment] . . . . (Javorcik and Spatareanu 2005, 47) Over the past decade or so a large body of research has examined knowledge spillovers from foreign direct investment (FDI). At several points along the way scholars have paused to take stock of the evidence (Blomström and Kokko 1998;Saggi 2002;Görg and Greenaway 2004). The verdict has largely been inconclusive. Indeed, the empirical inconclusiveness has become so infamous that virtually every study reviewed here begins with this observation as its main motivation. Explanations for the lack of conclusive results have focused on methodological and measurement issues (Görg and Strobl 2001), but this sort of approach has recently been disputed (Lipsey and Sjöholm 2005 The literature has developed in several directions to account for the ambiguity in earlier work. This study reviews these contributions, both theoretical and empirical. To provide some structure in a rapidly expanding field and to identify which approach or combination of approaches is likely to yield the most promising results, the study is structured around three themes. 1 More insight into the conditions under which knowledge spillovers from FDI are most likely to arise is especially important for developing countries. The highly ambiguous evidence to date on the existence of knowledge spillovers from FDI does not seem to warrant the large sums of money spent by governments to attract FDI. 2 After setting the stage in the following section, the article is then structured around figure 1, a representation of the FDI knowledge spillover process and the pieces of the puzzle that may affect it. 3 The section on opening the black box of FDI knowledge spillovers discusses the research on vertical linkages, worker mobility, and demonstration effects. This is followed by a review of the evidence o...

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Knowledge Spillovers Through FDI and Trade: The Moderating Role of Quality-Adjusted Human Capital

“…The paper differentiates between the two concepts of knowledge transfer and knowledge spillovers, as empirical studies tend to examine the effects of knowledge transfer rather than knowledge spillovers (Blalock and Gertler 2005). We explicitly define knowledge spillovers as knowledge involuntarily transmitted from one party to another (Smeets 2008).…”

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