Linking FDI motivation and host economy productivity effects: conceptual and empirical analysis
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Linking FDI motivation and host economy productivity effects: conceptual and empirical analysis Nigel Driffield and James H Love Economics and Strategy Group, Aston Business School, Aston University, Birmingham, UK Correspondence: JH Love, Economics and Strategy Group, Aston Business School, Aston University, Birmingham B4 7ET, UK. Tel: þ 44 121 204 3162; Fax: þ 44 121 204 3306; E-mail: [email protected]
Abstract We develop a taxonomy that relates foreign direct investment (FDI) motivation (technology- and cost-based) to its anticipated effects on host countries’ domestic productivity. We then empirically examine the effects of FDI into the United Kingdom on domestic productivity, and find that different types of FDI have markedly different productivity spillover effects, which are consistent with the conceptual analysis. The UK gains substantially only from inward FDI motivated by a strong technology-based ownership advantage. As theory predicts, inward FDI motivated by technology-sourcing considerations leads to no productivity spillovers. Journal of International Business Studies (2007) 38, 460–473. doi:10.1057/palgrave.jibs.8400268 Keywords: FDI motivation; productivity spillovers; technology
Received: 18 November 2005 Revised: 4 July 2006 Accepted: 14 August 2006 Online publication date: 29 March 2007
Introduction Two of the most important and most researched questions in international business are what determines foreign direct investment (FDI), and what effects FDI has on the economies of host countries. Both of these topics have given rise to an enormous quantity of both theoretical and empirical research; intriguingly, however, there is very little literature that directly links these two strands of research. This is in part because of the dichotomy that often exists between the international business and economics literature. Much of the analysis of the effects of FDI on host economies has been concerned with econometric studies of the externality or spillover effects of FDI on the domestic productivity of host nations. While such studies have become increasingly sophisticated in recent years, they rarely have any direct link with the substantial body of research in the international business journals concerning the motivation for FDI. As a result, in the empirical literature on spillovers, FDI is usually treated as a homogeneous exogenous factor, without consideration of its motivation (Head et al., 1995; Aitken et al., 1997; Barrell and Pain, 1997; Aitken and Harrison, 1999; De Mello, 1999). Whatever the reason for the lack of interaction between these two strands of research, it is clearly unsatisfactory that the literatures on the impacts of FDI and its determinants are so divorced. Technology plays an important part here, as it seems
Linking FDI motivation and host economy productivity effects
Nigel Driffield and James H Love
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plausible to hypothesise that productivity spillovers will be determined
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