The source of heterogeneous externalities: evidence from foreign multinationals in the UK

The relationship between inward investments and local firms' productivity is contingent on several contextual conditions that collectively define the ability of firms and regions to recognise, assimilate and commercially apply external knowledge. Yet the empirical literature has been unable to account efficiently for such multidimensional sources of heterogeneous externalities. We introduce a novel two-stage empirical methodology that allows accounting for a wide range of moderating circumstances. Relying on a sample of 11,000 UK firms over the period 2012–2018, we show that while the nature of places affects the potential externalities from multinational enterprises (MNEs), what matters more are firm-level characteristics. This has important implications for regional policy, particularly in understanding the drivers of inequality, both within and across regions.