FDI, Absorptive Capacity, and Productivity Growth : The Role of Inter-Industry Linkages

This paper examines the effects of foreign direct investment (FDI) on total factor productivity growth in Canadian manufacturing industries. In contrast with most previous studies, this paper focuses on the spillover effects of FDI taking place through inter-industry linkages and studies the role of absorptive capacity in enhancing the productivity benefits of FDI. Our main findings are: (i) FDI generates strong and positive spillover effects on TFP growth through both backward and forward linkages; (ii) the absorptive capacity in downward stream industries enhances the positive spillover effects of FDI on productivity growth; (iii) research and development (R&D) stocks and the wage share of high-skilled workers are positively correlated with productivity growth across industries; and (iv) imports raises productivity growth in R&D-intensive industries