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 FDI on firm labour productivity we find: (i) positive intra‐industry spillover effects for firms located in advanced countries, consistent with knowledge diffusion and increased competition from foreign firm and (ii) positive backward spillover effects for firms located in emerging and developing countries, consistent with foreign firms' higher demand for local inputs. These spillovers are driven entirely by FDI from advanced countries. The results from cross‐border M&As are noisier, but suggestive of positive intra‐industry spillovers in advanced countries and negative backward spillovers in emerging markets and developing countries.