Does trade participation limit domestic firms’ productivity gains from inward foreign direct investment?

Abstract

We examine to what extent domestic firms reap differential productivity gains from the presence of manufacturing affiliates of multinational firms in the home country (FDI spillovers), in the context of simultaneous participation in international trade through exporting and importing. FDI spillovers can occur within the industry (horizontal) and across industries due to client (forward) or supplier (backward) linkages of multinational firms, but the mechanisms underlying spillover effects may be attenuated if local firms are less reliant on inputs, clients, and competition in the domestic market. Fixed effects panel analyses on a sample of 4594 domestic Belgian firms during 2000–2007 reveal positive effects from horizontal, backward, and forward FDI spillovers on the productivity levels of domestic firms, as long as these firms do not engage in international trade. Horizontal spillovers from FDI are weaker for firms engaging in trade, while forward FDI spillovers do not benefit importing firms. Two-way traders benefit least from FDI spillovers. Forward and backward spillovers, are enhanced by human capital levels in local firms, while horizontal spillovers are reduced. The findings are broadly consistent with the notion that trade engagement and inward FDI can be substitutes in their effects on domestic firms’ productivity.