Productivity, Multinationals and Knowledge Spillovers: Evidence from the UK Retail Sector

This paper discusses the impact of foreign-ownership presence on the productivity performance of domestically-owned British retailers. In specific, we investigate the existence of productivity spillovers in the form of knowledge transfer. To guide our estimations, we develop a simple Hotelling model in which we show how the transfer of operational knowledge from MNE to non-MNE retailers, may result to an increase in the productivity of the latter and increased economic activity in the regions with relatively higher concentration of foreign investment. Our empirical estimations lend support to the assumptions upon which the theoretical model is built, while confirming the positive and highly significant impact of these spillovers on the productivity performance of domestic firms. More specifically, using data from the Annual Respondent Dataset (ARD), we find that positive spillovers exist but are mostly confined to the region in which foreign subsidiaries locate. Furthermore, the productivity benefit from regional FDI spillovers increases with the absorptive capacity of domestic retailers.