The impact of FDI on linkages. and technology transfer

Transcription

1 The impact of FDI on linkages and technology transfer KAMAL SAGGI Presentation at Corporación Andina de Fomento June 15th, 2005 Overview Both international trade and foreign direct investment (FDI) have grown rapidly since WW II. The gross product of affiliates of multinational firms almost tripled between 1982 and Increased much faster than world trade. Has this increase in FDI contributed to international technology transfer and economic growth? If so, how? Role of linkages? Market forces and the policy environment. Technology spillovers and linkages from FDI. Growth effects of FDI.

2 International technology transfer Difficult to gauge the overall magnitude of ITT occurs through a multitude of channels. Trade (especially in capital goods): In 1975, approximately 23% of total world trade was trade in capital goods whereas in 1996 this ratio was over 30%. Explicit trade in technology: Global payments of fees and royalties for technology transfer quadrupled to $48 billion between 1983 and FDI: Almost 80% of these payments were intra-firm, so FDI and technology transfer go hand-inhand. Role of FDI Today, intra-firm trade (i.e. trade between subsidiaries and headquarters of multinational firms) may account for onethird of total world trade and sales of subsidiaries of multinational firms now exceed worldwide exports of goods and services. While most FDI occurs between industrial countries, developing countries are becoming increasingly important host countries for FDI: 33% of the global stock of FDI today is in developing countries. Latin America and the Caribbean hold about 11% of the global stock of FDI with Brazil, Argentina, Chile, and Venezuela being the four largest recipients.

3 FDI and technology transfer Multinational firms are concentrated in industries that exhibit a high ratio of R&D relative to sales and a large share of technical and professional workers. Take advantage of their knowledge based assets in multiple markets. Technology payments and receipts have risen steadily since the mid-1980 s: For example, from 1985 to 1997, United States receipts of royalties and license fees increased from approximately $6 billion to over $33 billion. In a typical year, about 80% of global royalty payments are intra-firm (i.e. Between subsidiaries and parent firms). Spillovers for local firms? What does the word spillover mean? Is it reasonable to even expect spillovers to occur from FDI? The OLI paradigm. Multinationals transfer newer technologies internally and license older ones. How might knowledge diffuse? Demonstration effects Labor movement Vertical spillovers.

4 Channels of spillovers Demonstration effects related to the idea of discovering your comparative advantage. Labor Movement Really crucial channel. Mixed evidence so far. Vertical Linkages discuss later. Evidence on horizontal spillovers? Two types of empirical studies: sectoral level and plant level. Sectoral level studies: positive relationship between the extent of foreign presence and productivity. Self-selection problem: Does FDI go to the more productive sectors? Plant level studies of FDI These studies cast significant doubts regarding spillovers from FDI. Typical findings: Plants with foreign involvement are more productive than purely domestic plants. Affirmation of FDI s role in technology transfer. Productivity at domestic plants is negatively correlated with the extent of foreign presence. Evidence of weak negative spillovers? Overall, a small positive effect of FDI on productivity across all plants. Absorptive capacity: stronger evidence of spillovers in low tech sectors. Local competition and investment matter.

5 How to explain negative spillovers? Negative spillovers result - is it a cause for serious concern for developing countries? Possible explanations: Market share decline and economies of scale. Time needed to adjust to foreign competition future entrants will be more efficient. Studies do not capture the vertical aspect of technology transfer. Policy implications: Difficult to argue in favor of fiscal and financial incentives for FDI based on horizontal spillovers. Competition for FDI is probably not in the interest of the developing countries. Linkages from FDI Vertical versus horizontal spillovers. Multinationals may have a strong incentive to encourage technology transfer to potential suppliers. Evidence? Both econometric studies and case studies are supportive. For example, in Mexico, extensive backward linkages resulted from FDI in the auto industry: within 5 years of investments by major US auto manufacturers, there were 300 domestic producers of parts and accessories. US firms transferred technology to domestic suppliers: industry best practices, zero defect procedures, production audits etc.. Improved productivity and quality. As a result of increased competition and efficiency, Mexican auto exports boomed.

6 FDI and growth FDI is investment. So one should expect a positive relationship. Caveat: multinationals can also raise capital in the local market. But: technology transfer is key. Aggregate level studies: - Positive relationship between economic growth and inward FDI. - can be even more productive than domestic investment when the host country has a minimum threshold stock of human capital. - Growth effects of FDI are stronger in countries with relatively liberal trade policies (export promotion versus import substitution). Policy environment for FDI Proliferation of bilateral investment treaties. No multilateral agreement regarding investment exists. Should we have one? Where do the interests of Latin American countries lie? Use of fiscal and financial incentives to attract FDI. Is such optimism with respect to FDI justi- fied? Countries also seek to restrain the multinationals through various performance measures (domestic content requirements, export requirements, etc.). Benefits of such policies are far from clear.