The most important reason why countries try to attract foreign direct investment (FDI) is perhaps the prospect of acquiring modern technology. By inviting multinational corporations (MNCs) to invest within their national boundaries, host countries hope to gain access to technologies they cannot produce themselves. Foreign investment can result in benefits for host countries even if the MNCs decide to carry out their foreign operations in wholly-owned affiliates, since technology to some extent is a public good. These benefits take the form of various types of externalities, and are often referred to as ‘productivity spillovers’.

In Discussion Paper No. 1365, Research Fellow Magnus Blomström and Ari Kokko examine spillover effects from the activities of MNCs. Such effects are most likely to be found in host countries, where the operations of foreign MNCs may influence local firms in the same industry, as well as firms in other industries. There is no comprehensive evidence on the exact nature or magnitude of these effects, however, although recent research suggests that host country spillovers vary systematically between countries and industries. In particular, the positive effects of foreign investment are likely to increase with the level of local capability and competition. The spillovers to the home countries of MNCs are often more difficult to identify, for various reasons. Earlier studies suggest that the effects are generally positive, but the increasing international division of labour within multinationals complicates the analysis. The impact on the home country is likely to depend on what activities these firms concentrate on at home.

Multinational Corporations and Spillovers
Magnus Blomström and Ari Kokko