Foreign direct investment and technology spillovers in low and middle-income countries: A comparative cross-sectoral analysis
Jojo Jacob & Simone Sasso
#2015-035
In this paper we analyse the trends in Foreign Direct Investment (FDI)
flows worldwide across sectors and across value-chain activities, with a
particular focus on low- and middle-income countries in comparison with
advanced countries. We begin by discussing the growing fragmentation of
global production and the opportunities this presents to today's
developing countries for benefiting from FDI. Our review of the
literature on knowledge spillovers via FDI indicates that spillovers
typically occur along the value chain, from foreign firms to their local
suppliers or clients but not to their competitors, and that tapping into
the technological resources of foreign firms is not an automatic process
but hinges on a few host-economy characteristics. Our analysis of
worldwide FDI flows during 2008-2013 indicates the growing importance of
countries outside the traditional industrialised world, accounting for
nearly half of inward greenfield FDI projects. While FDI flows into
industrialised economies and emerging industrial economies take place
mainly in high- or medium-tech manufacturing, other developing countries
and least developed countries tend to attract FDI in medium- and
low-tech manufacturing. When we examine FDI flows across value-chain
activities, we find that emerging economies are attracting increasingly
more knowledge-based FDI, with China and India hosting the highest
number of FDI projects in innovation activities. Finally, our analysis
suggests that - especially in the manufacturing sector - Multinational
Enterprises (MNEs) tend to invest more in countries where domestic
technological efforts are higher, pointing to the importance of
indigenous technological capacities in attracting FDI in the first
place, but also in ensuring that these investments generate knowledge
spillovers that are crucial for technological catching up by developing
countries.
JEL Classification: F21; O11; O33
Keywords: Foreign Direct Investment, FDI Spillovers, Indigenous
Capabilities, Global Value Chain, Catch Up, Emerging Economies.