Absorptive Capacity of Domestic Firms is Crucial for Knowledge Spillovers from Foreign-Owned to Domestic Firms

Absorptive capacity for knowledge spillovers in domestic firms depends mainly on the level of technological development, research and development as well as on the innovation activity, level of development of human capital, productivity level and/or export orientation.

Authors: Matija Rojec, Mark Knell

The authors (Matija Rojec of the Faculty of Social Sciences of the University of Ljubljana and Mark Knell of the NIFU Nordic Institute for Studies in Innovation Research and Education) analyse the latest substantive and methodological contributions to knowledge spillovers analysis from foreign direct investment (FDI), which has brought some more optimistic results as far as FDI spillovers are concerned and can help in further development of this field of research. The findings were published in the academic Journal of Economic Surveys.

Knowledge spillovers from foreign-owned to domestic firms is potentially one of the most significant development effects of inbward foreign direct investment (FDI) for the host country. Empirical analyses of knowledge spillovers from FDI offer no conclusive results: They find positive, neutral and even negative FDI spillover effects. The lack of evidence on FDI spillovers originates in the use of the econometric analysis of firm level panel data. This is important since this approach is the most appropriate for estimating FDI spillovers. The paper looks at recent substantive and methodological developments in FDI spillovers analysis, which offers more optimistic results in terms of FDI spillovers and can help in further development of this field of research itself. 

The main substantive development relates to the introduction of a broad variety of sources of firm (foreign affiliates as well as local firms) heterogeneity in the analysis. Other substantive innovations include differentiation between vertical (inter-industry) and horizontal (intra-industry) spillovers, and absorption capacity for knoledge spillovers of the host country and domestic firms. Methodological developments relate to distinguishing between technological/knowledge and productivity spillovers, to the improvement of modelling and estimation methods, and to the increased amount and quality of data. On this path we should eventually see that the absorptive capacity of domestic firms is crucial for knowledge spillovers from foreign-owned firms to domestic firms.

Source: Why is there a lack of evidence on knowledge spillovers from foreign direct investment? Journal of Economic Surveys, 2017, vol. 31, http://onlinelibrary.wiley.com/doi/10.1111/joes.12207/full.