Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?

Are there productivity spillovers from FDI to domestic firms, and, if so, how much should host countries be willing to pay to attract FDI? To examine these questions we use a plant-level panel covering UK manufacturing from 1973 through 1992. Across a wide range of specifications, we estimate a significantly positive correlation between a domestic plant’s TFP and the foreign-affiliate share of activity in that plant’s industry. This is consistent with positive FDI spillovers. We do not generally find significant effects on plant TFP of the foreign-affiliate share of activity in that plant’s region. Typical estimates suggest that a 10 percentage-point increase in foreign presence in an UK industry raises the TFP of that industry’s domestic plants by about 0.5%. We also use these estimates to calculate the per-job value of these spillovers. These calculated values appear to be less than per-job incentives governments have granted in recent high-profile cases, in some cases several times less.