Vertical and Horizontal Spillovers from Foreign Direct Investment: Evidence from Malaysian Manufacturing

Abstract

Given developing countries’ dependence on foreign direct investment (FDI) in manufacturing, it is important to assess the benefits that accompany FDI, given the cost of incentives that are used to attract foreign investments. We empirically analyze FDI spillover effects in Malaysia using unpublished establishment-level data, accounting for domestic firm size, the market orientation of local firms and foreign multinationals, and firm technology level and absorptive capacity. We find weak evidence of horizontal spillovers; backward and forward spillovers are negative in most cases. Because these results raise concerns about the technological capability of local firms, government policies on technology, human resource, education, and R&D should address this.