DP12205 Foreign Investment and Domestic Productivity: Identifying Knowledge Spillovers and Competition Effects

Author(s): Christian Fons-Rosen, Sebnem Kalemli-Ozcan, Bent E Sørensen, Carolina Villegas-Sanchez, Vadym Volosovych
Publication Date: August 2017
Date Revised: October 2018
Keyword(s): Competition, FDI, multinationals, selection, technology, TFP
JEL(s): E32, F15, F36, O16
Programme Areas: Industrial Organization, International Macroeconomics and Finance, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12205

We study the impact of FDI on the productivity of host-country firms. FDI has positive spillovers only when foreign and domestic firms use similar technologies. Channeling FDI to sectors where firms share similar technology would significantly increase productivity spillovers from FDI. We show that inventor mobility across sectors is a key channel of technology transfer. To deal with endogeneity concerns we control for sectoral productivity growth, construct a Bartik-style instrument based on the productivity growth of neighboring countries, and exploit differences in knowledge flows across sectors captured by an asymmetric patent citation matrix.