FDI productivity spillovers (Spillovers)

Abstract:

The purpose of the project is to examine whether FDIs have a positive effect on the productivity of domestic companies. We argue that this effect depends on the ‘absorptive capacity’ of the domestic companies. By measuring this absorptive capacity through the technological distance between the domestic and foreign companies, we hypothesise that the relationship between distance and productivity improvements can be described through an inverse U function. Our contribution to the literature is how we measure the productivity of global companies. By means of their worldwide operations, these companies can change their accounting activity relatively easily, and thereby hide their true productivity in a specific country. This kind of misreporting is common when companies pay different taxes in the various countries. By using a unique panel dataset, which retains all European companies and their ownership structure, and by using tax differences as an instrument to adjust productivity measurements, we will test whether there are positive effects, and if they fit our inverse U function, as the hypothesis claims.