Productivity Spillovers from Foreign Direct Investment to Ethiopian Manufacturing Sector

Abstract

The study investigates productivity spillover from foreign direct investment (FDI) to domestic firms in the Ethiopian manufacturing industries. The system generalised method of moments (SYS-GMM) estimator using panel data of manufacturing firms for the years 2011–2016 with 12,006 observations grouped under 102 industries was employed. The results show a coexistence of both negative and positive productivity spillover effects from FDI to domestically owned firms at a moderate level of absorptive capacity. Specifically, foreign presence in the industries contributed to a positive and significant horizontal and backward productivity spillover effect on domestic firms on an average level. The horizontal productivity spillover is transmitted to local firms through demonstration and competition effects at a moderate level. Likewise, vertical productivity spillover occurred through the channel of sales of intermediate goods and services to foreign firms. We have observed that the technology gap is a critical factor among those factors that determine the productivity spillover occurrence. Finally, policy measures aimed at minimising the technology gap between foreign and domestic firms to maximise the productivity spillover effect are suggested. Since the result shows that the spillover effects in all firms are not equal, prioritisation as per their promise is recommendable in an FDI-attracting framework. JEL: C33, D29