Transmission channels matter: Identifying spillovers from FDI

Abstract

The empirical literature on the spillovers of foreign direct investment (FDI) has so far not analysed the well-established theoretical transmission channels through which FDI impacts on domestic firms. This paper shows how channels of transmission matter for productivity spillovers from FDI by providing more fuller and nuanced picture of the effects. We analyse a panel of eight sub-Saharan Africa countries spanning the period 2006–2014 and demonstrate the empirical relevance of distinguishing three channels – demonstration, labour mobility, and competition. We provide measures of these effects and also show that the size, significance, and sign of spillover effects depend on the local absorptive capacity, technology levels, geographical proximity, and foreign ownership structure. Overall, results suggest that demonstration spillovers are large and economically significant, whereas the patterns of labour mobility and competition spillovers are not stable across the various specifications and measures. Finally, the analysis involves several measures of further investigations and robustness checks. Results are robust to the construction of spillover and outcome variables, the introduction of additional explanatory variables and an alternative estimation method.