Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues by
the Vale Columbia Center on Sustainable International Investment
No. 98 July 1, 2013
Editor-in-Chief: Karl P. Sauvant (Karl.Sauvant@law.columbia.edu)
Managing Editor: Jennifer Reimer (jreimer01@gmail.com)
Do host countries really benefit from inward foreign direct investment?
by
Byungchae Jin, Francisco García and Robert Salomon*
It was with great interest that we read Perspective No. 84 addressing the impact of inward foreign direct investment (IFDI) on technological innovation and entrepreneurship.[1]
In that issue, Pathak, Laplume, and Xavier-Oliveira laid out arguments
for and against IFDI. They suggested that we have, for far too long,
extolled the benefits of IFDI for developing economies, without properly
accounting for its costs. They noted that there are genuine concerns
that we ought not to overlook, and that we should pay special attention
to the impact of IFDI on local innovation and entrepreneurship.
Understanding the relationship between IFDI and innovation is an
important policy issue, as it can help inform whether, and how, IFDI can
stimulate economic growth.
Central
to addressing the debate regarding the effect of IFDI on local
innovation is to determine whether foreign entrants enhance the
innovativeness of local firms, or crowd out domestic innovation. One
line of reasoning suggests that IFDI ought to lead to greater levels of
local innovation as a result of knowledge spillovers to local firms. In
addition, foreign entrants provide local firms an incentive to innovate
as a means to compete, or in the case of vertical linkages, better to
meet technical supply requirements.
Another
line of reasoning casts doubt on the positive impact of IFDI,
suggesting that foreign entrants relegate local firms to less
innovative, less profitable market niches. Moreover, since foreign firms
generally pay higher wages, foreign entrants might attract
higher-skilled labor, leaving domestic firms short on talent -- a key
ingredient to innovation. Foreign entry can also reduce the expected
returns to entrepreneurship, creating a situation in which the best
would-be entrepreneurs prefer to take employment with foreign firms
instead of founding new enterprises.
In
order to address one aspect of this debate, we studied the effects of
IFDI on productivity and innovation in the manufacturing sector of Spain
from 1990 through 2002.[2] During that period, Spain received nearly € 45 billion of IFDI in manufacturing.[3]
And though Spain is not a developing economy by traditional metrics,
relative to its OECD counterparts, it is a laggard. Hence, Spain is
considered a middle-income, developed country;[4]
and given its position between developed and developing markets, Spain
makes an interesting setting in which to test the relationship between
IFDI and innovation.
Interestingly,
as IFDI increased in specific industries, Spanish manufacturing firms
improved their productivity (both total factor productivity and labor
productivity). However, as IFDI rose in those same industries, Spanish
firms subsequently applied for fewer patents and introduced fewer new
products.
These
findings highlight the importance of distinguishing between
productivity and innovation when considering the net benefits of IFDI.
Productivity and innovation might not capture the same outcomes, and may
therefore speak to two very different aspects of the debate.
For
example, productivity captures short-run improvements in allocative and
technical efficiency. Therefore, to the extent that Spain lags the
global technological frontier in high-tech manufacturing,[5]
we may simply observe productivity increases as a result of a catch-up
effect -- i.e., Spanish firms adopting the more efficient manufacturing
techniques that entrants bring with them.
Innovation,
by contrast, may be a better indicator of the long-run consequences for
growth. To the extent that IFDI crowds out local innovation, it may
fail to provide desired growth outcomes. IFDI may actually hinder the
development of technological capabilities among local firms and, hence,
the long-term growth prospects of local economies.[6]
Circling
back to the issue of whether to encourage IFDI as a matter of policy,
there is reason for pause. Our findings call into question whether IFDI
can serve as a long-run growth catalyst, or whether it simply offers a
short-term fix. Sure, IFDI may spur job creation, increase tax revenues
and improve the productivity of local firms. Those outcomes benefit the
host country and are welfare enhancing in the near term. However, as a
consequence of IFDI, local innovation may become impaired, dampening
long run economic growth, development and social welfare.
All
things considered, there are potential tradeoffs between IFDI’s
near-term benefits and its long-run costs. This is not to say that IFDI
should be discouraged. Rather, policies that subsidize foreign entry
ought to be thought through carefully. Policymakers would be well served
to pay special attention to tradeoffs, and enact policies that are
consistent with long-term development objectives.[7]
The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Byungchae Jin, Francisco García and Robert Salomon, ‘Do host countries really benefit from inward foreign direct investment?,’
Columbia FDI Perspectives, No. 98, July 1, 2013. Reprinted with
permission from the Vale Columbia Center on Sustainable International
Investment (www.vcc.columbia.edu).” A copy should kindly be sent to the
Vale Columbia Center at vcc@law.columbia.edu.
* Byungchae Jin (bjin@sfu.ca)
is Assistant Professor of Innovation and Entrepreneurship at the Beedie
School of Business at Simon Fraser University in Canada; Francisco
García (fgarciap@uniovi.es) is Assistant Professor of Management at the School of Economics and Business, Universidad de Oviedo; Robert Salomon (rsalomon@stern.nyu.edu)
is Associate Professor of International Management and the Daniel P.
Paduano Family Fellow of Business and Ethics at the NYU Stern School of
Business. The authors are grateful to John Kline, Wolfgang Sofka and
Zheying Wu for their helpful peer reviews. The views expressed by the authors of this Perspective do not necessarily reflect the opinions of Columbia University or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
[1] Saurav Pathak, André Laplume and Emanuel Xavier-Oliveira, “Inward foreign direct investment: Does it enable or constrain domestic technology entrepreneurship?,” Columbia FDI Perspectives, No. 84 (December 3, 2012).
[2] Francisco García, Byungchae Jin and Robert Salomon, “Does inward foreign direct investment improve the innovative performance of local firms?,” Research Policy, vol. 42 (February 2013), pp. 231-244.
[3] OECD Statistics Database.
[4] Guillén Mauro. The Rise of Spanish Multinationals: European Business in the Global Economy (Cambridge: Cambridge University Press, 2005).
[5]
Robert Salomon and Byungchae Jin, “Does knowledge spill to leaders or
laggards? Exploring industry heterogeneity in learning by exporting,” Journal of International Business Studies, vol. 39 (January 2008), pp. 131-150.
[6] García, Jin and Salomon, op. cit.
[7] John Kline, “Evaluate sustainable FDI to promote sustainable development,” Columbia FDI Perspectives, No. 82 (November 5, 2012).
For further information, including information regarding submitting to the Perspectives, please contact: Vale Columbia Center on Sustainable International Investment, Jennifer Reimer, jreimer01@gmail.com. In addition to her role as Research Associate for the VCC, Ms. Reimer is Legal Counsel for LG Electronics’ Regional Headquarters for the Middle East and Africa.
==========
The
Vale Columbia Center on Sustainable International Investment (VCC), led
by Lisa Sachs, is a joint center of Columbia Law School and the Earth
Institute at Columbia University. It is the only applied research center
and forum dedicated to the study, practice and discussion of
sustainable international investment, through interdisciplinary
research, advisory projects, multi-stakeholder dialogue, educational
programs, and the development of resources and tools.
Most recent Columbia FDI Perspectives
· No. 97, Abdoul’ Ganiou Mijiyawa, “Myopic reliance on natural resources: How African countries can diversify inward FDI,” Columbia FDI Perspectives, June 17, 2013.
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· No. 95, Terutomo Ozawa, “How do consumer-focused multinational enterprises affect emerging markets?,” Columbia FDI Perspectives, May 20, 2013.”
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· No. 93, Xiaofang Shen, “How the private sector is changing Chinese investment in Africa,” Columbia FDI Perspectives, April 15, 2013.
· No. 92, Vid Prislan and Ruben Zandvliet, “Labor provisions in bilateral investment treaties: Does the new US Model BIT provide a template for the future?,” Columbia FDI Perspectives, April 1, 2013.
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· No. 90, Shaun E. Donnelly, “A business perspective on a China - US bilateral investment treaty,” Columbia FDI Perspectives, March 4, 2013.
· No. 89, Joachim Karl, “Investor-state dispute settlement: A government’s dilemma,” Columbia FDI Perspectives, February 18, 2013.
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All previous FDI Perspectives are available at http://www.vcc.columbia.edu/content/fdi-perspectives.
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