To share or not to share: Does local participation matter for spillovers from foreign direct investment?

Abstract

This paper examines whether the degree of spillovers from foreign direct investment is affected by the foreign ownership share in investment projects. The analysis, based on an unbalanced panel of Romanian firms from 1998-2000, provides evidence consistent with positive intra-sectoral spillovers resulting from fully-owned foreign affiliates but not from projects with joint domestic and foreign ownership. This finding is consistent with literature suggesting that foreign investors tend to put more resources into technology transfer to their wholly-owned projects than to those owned partially. The data also indicate that the presence of partially foreign-owned projects is correlated with higher productivity of domestic firms in upstream industries, suggesting that domestic suppliers benefit from contacts with multinational customers. But the opposite is true for fully-owned foreign affiliates, which appear to have a negative effect on domestic firms in upstream industries. These results are consistent with the observation that foreign investors entering a host country through greenfield projects are less likely to source locally than those engaged in joint ventures or partial acquisitions. They are also in line with the evidence suggesting that fully-owned foreign subsidiaries use newer or more sophisticated technologies than jointly-owned investment projects, and thus may have higher requirements which only a few, if any, domestic suppliers are able to meet.