DO MNCS' HIGH QUALITY AND STANDARD REQUIREMENTS MATTER? A CHANNEL FOR VERTICAL SPILLOVERS

ABSTRACTThis study attempts to investigate how Multinational Corporations (MNC) transfer their knowledge and technology to local firms through backward linkages established between both of firms. The objective was to fill a research gap, where the channels through which technology and knowledge were transferred remained unexplored in the existing Foreign Direct Investment (FDI) spillover literature. A case study method was adopted as it is appropriate for exploring the complex process of technology transfer. It would have been effective in order to conduct in-depth analysis on the effect of linkages, which would have been difficult to achieve using quantitative analysis. The findings highlight that FDI and innovation activities from MNCs may represent a source of knowledge and technology know-how. Hence, local suppliers may gain a number of advantages from establishing linkages with MNCs. The findings not only provide benefit to the academic circle but also to local businesses, especially small and medium industries, as well as policy makers. The managerial and policy implications derived from the findings are relevant, not only to Malaysia, but also to other developing countries, particularly Malaysia's neighbouring countries.Keywords: FDI Spillovers; Backward Linkages; Technology and Knowledge Transfer; Malaysia; MNC.1. INTRODUCTIONIt is well documented that Foreign Direct Investment (FDI) have been regarded as the main vehicle for technology and knowledge spillovers from Multinational Corporations (MNC) to local firms (Branstetter, 2000; Keller and Yeaple, 2003; Giroud, 2003; Ivarsson and Alvstam, 2005; Liu and Buck, 2007; Blalock and Simon, 2009; Liu, Wang and Wei, 2009). However, the channels through which technology and knowledge were transferred remain unexplored in the available FDI spillover literature. In this paper, an MNC is regarded as the firm that has headquarters in its own country and having production activities in more than one country (Porter, 1990). Most of the prior studies on FDI spillovers were based on secondary data analysis and used FDI inflows, exports and imports, as proxies of spillovers from foreign firms to local firms at industry level and firm level in various countries. Therefore, these factors were regarded as the main channels of technology spillovers in many previous studies (see meta- analysis study by Gorg and Greenaway, 2004). Moreover, many studies have also investigated and confirmed that vertical linkages between Multinational Corporations (MNC) and domestic suppliers are regarded as a channel for the diffusion of technology (Rodriguez-Clare, 1996; Markusen and Venables, 1999; Javorcik, 2004; Ivarsson and Alvstam, 2005; Liu, Wang and Wei, 2009), based on secondary data analysis.Advance technology and knowledge know-how from FDI to developing countries like Malaysia may spillover to other firms in the sectors in recipient host country. A study by Sjoholm 1999 suggests that when the technology and knowledge is transferred from the parent firm to their local affiliates, it leaks to the host country firms. The technology transfer to firms subsequently may create knowledge spillover in countries where it is considered as unintentional transfer of technology or knowledge that is exchanged outside the intended boundary. The technology introduced by foreign firms may spillover horizontally or vertically to local firms.Despite the growing body of research on the topic and the belief that FDI may act as catalyst for technology and knowledge transfers are still treated as a 'black box'. There is little evidence on how and in what ways technology and knowledge are diffused. Hence, this study goes beyond the existing research in the area of FDI spillovers by opening the black box of Multinational Corporation's (MNC) technology and knowledge spillovers in Malaysia. This study focuses on MNCs as the generators of spillovers and local suppliers as receivers through vertical linkages and business relationships. …