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Discussion Paper Details

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Title: Foreign Entry and Spillovers with Technological Incompatibilities in the Supply Chain

Author(s): Juan Carluccio and Thibault Fally

Publication Date: June 2010

Keyword(s): host country welfare, multinational firms, pecuniary externalities and technological incompatibilities

Programme Area(s): International Trade and Regional Economics

Abstract: Does foreign entry improve host country productivity and welfare? Existing studies have focused on the role of technology spillovers and backward linkages with domestic suppliers. In this paper, we study how these externalities are affected by technological incompatibilities between foreign and domestic technologies. When foreign technologies require specialized inputs, some local suppliers self-select into production for multinational firms. A decrease in the cost of inputs compatible with the foreign technology has heterogeneous effects. It benefits foreign firms and the most productive downstream domestic firms adopting the foreign technology, and negatively affects firms using the domestic technology. The impact on welfare is positive when we allow for endogenous entry in both upstream and downstream industries, but welfare gains can be negatively related to observed foreign presence at equilibrium. Our model can also reproduce various stylized facts drawn from the empirical literature on vertical and horizontal FDI spillovers.

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Bibliographic Reference

Carluccio, J and Fally, T. 2010. 'Foreign Entry and Spillovers with Technological Incompatibilities in the Supply Chain'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7866