FDI and Local Adjustment Costs: Evidence from a Natural Experiment in Morocco

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This paper estimates the causal impact of foreign direct investment (FDI) on domestic manufacturing firms in Morocco using a firm-level panel dataset (1995–2013) and a sector-specific policy reform introduced in 2005. Employing a difference-in-differences instrumental variable strategy, we find that a 10-percentage-point increase in foreign presence is associated with a reduction of approximately 15% in domestic firms’ labour productivity. The pattern of effects, concentrated among skill-intensive firms and geographically localised within cities hosting multinationals, is most consistent with intensified competition for skilled labour in thin local labour markets rather than with product-market displacement, though we cannot rule out other localised mechanisms in the absence of matched employer–employee data. We find no evidence of positive productivity spill-overs through upstream or downstream supply-chain linkages, a pattern consistent with limited absorptive capacity and weak integration of domestic firms into MNC-led supply chains. These findings are consistent with a role for localised labour-market competition in shaping FDI spill-overs in skill-scarce developing economies, a pattern also documented in comparable middle-income contexts, and suggest that effective FDI strategies require complementary investments in skills and domestic supplier capabilities.