Spillover and Backward Linkage Effects of FDI: Empirical Evidence for the UK

Recent work (including that of the author) on the impact of FDI has been based on microlevel(i.e. firms, establishments or plants) data, since this allows much greater control whenexamining such issues as whether FDI plants are more productive or innovative; whetherthere are spillovers to indigenous plants from FDI; and whether foreign-owned plants canfacilitate the building-up of clusters. The traditional approach (which is still prevalent in theliterature) considers whether those industries and/or regions with the greatest concentrationsof FDI experience higher productivity, growth, spillovers, clustering affects, but suchanalysis does not tackle the issue of cause-and-effect and therefore amounts to little morethan observing correlations between the growth of FDI in an industry/region and the overallgrowth of the industry/region. If FDI plants are attracted to co-locate with better performingindustries and/or 'regions' (to benefit from potential spillovers themselves), then this does notamount to FDI necessarily being the source of greater economic benefits. Thus the purpose ofthis review paper is to report on the empirical evidence for the UK (recent and historical)specifically related to: (i) FDI plants - are they 'better' (i.e. have higher productivity, or moreinnovative, etc)? And predicated on whether FDI is better: (ii) are there spillovers from FDI?Lastly, (iii) are clusters established around FDI plants? The limitations of this evidence-baseare discussed and, together with the results reported in the literature, resulting in some keyresearch questions that need to be addressed in future empirical work, especially at the spatiallevel in the UK.