Productivity spillovers from FDI: A firm-level cross-country analysis

This paper provides cross-country firm-level evidence on productivity spillovers from foreign direct investment (FDI), separately for greenfield FDI and cross-border mergers and acquisitions (M&As). The granularity of bilateral sector-level FDI datasets allows for addressing possible endogeneity issues by applying a two-step approach whereby an exogenous FDI measure is constructed from a gravity-type regression of bilateral FDI flows. When looking at the effects of greenfield investments on firm labour productivity we find: i) positive intra-industry spillover effects for firms located in advanced countries, and ii) positive backward spillover effects for firms located in emerging and developing countries. These spillovers are driven entirely by FDI from advanced countries. The results from cross-border M&As are noisier, with weakly suggestive evidence for positive intra-industry spillovers in advanced countries but negative backward spillovers in emerging markets and developing countries.

Shan Chen and Chao Wang provided excellent research assistance. We thank Ashique Habib, Davide Malacrino, Niclas Frederic Poitiers, and seminar participants at the Bruegel research seminar for helpful comments and suggestions. The views expressed in this paper are those of the authors and should not be attributed to the International Monetary Fund, its Executive Board, or its management.