FDI and productivity: facts versus fiction of high growth

Abstract

PurposeThis paper aims to study the role of foreign direct investment (FDI) channels in improving local firms' productivity. Two transmission channels of knowledge spillovers are empirically investigated. The study focuses on the role of high-growth firms (HGFs) that are assumed to have a higher absorptive capacity.Design/methodology/approachA threshold regression model that considers country and sector fixed effects is applied to investigate 8525 firms across 50 sectors in 12 developing countries in the East Asia and Pacific (EAP) region.FindingsThe author's findings indicate that first, larger firms with external market linkages are more productive. Second, high-growth enterprises are powerful engines of job creation; however, the firms do not outperform other firms in terms of capacity in absorbing FDI spillovers and do not have higher productivity.Research limitations/implicationsThe findings highlight the necessity of rethinking public policy priorities to support firm growth. Policies to maximize the gains from FDI spillovers are discussed.Originality/valueThis is the first study to investigate the strength of FDI spillover channels across different sectors, and the channels' impact on the productivity of local enterprises in the EAP region. This study also explores the potential role of high-growth firms (HGFs) in this interaction via job creation and improving output growth rate.