knowledge-capital model that incorporates spatial correlations in the independent variables and find that third-country characteristics exert significant effects on FDI flows. The linkage between host countries declines with bilateral distance among the host countries. Using sectoral FDI data, Blonigen et al. (2007) examine how investments in third countries affect a country's receipt of U.S. FDI. They find evidence of negative interdependence across proximate host countries, a result consistent with export-platform FDI theory, among European OECD members. The importance of third-country effects in inbound FDI is shown in Blonigen et al. (2008). The authors find a strong parent market proximity effect whereby parent markets' proximity to large third nations increases the volume of FDI. Similarly, Chen (2011) examines the cross-country interdependence in French multinationals' production networks using subsidiary-level data and finds strong spatial interdependence in multinationals' foreign production networks. The role of distance and transportation cost depends on the input-output linkages between subsidiary locations. MNCs are more likely to locate final-good production in countries with large market potential, vertically linked subsidiaries in proximate countries, and horizontally linked subsidiaries in remote locations.<sup>4</sup>

# 2.2 The Impacts of FDI in BRI Countries

The economic impacts of FDI have been studied in a large body of literature, through macro, crosscountry analysis as well as micro, firm-level research. At the macro level, numerous studies, including, for example, the work by Borensztein et al. (1998) and Alfaro et al. (2004), have examined the relationship between FDI and economic growth. Evidence suggests that FDI could exert a positive effect on economic growth when host countries meet certain economic conditions, including sufficient human capital stock and relatively developed financial markets. At the firm level, an extensive volume of research has examined the effects of FDI on host countries in a variety of dimensions including productivity, employment, wage rate, and export performance. The productivity effect of FDI, in particular, has attracted considerable empirical attention.

In this sub-section, we discuss the literature evaluating the impacts of inward FDI in the context of BRI countries. The literature presented here is based primarily on analysis of historical FDI data in OBOR countries prior to the OBOR initiative. Table A.1 in the appendix provides a summary of studies discussed in this Section.

An extensive empirical literature assesses the existence of productivity spillover from multinational to domestic firms. Such spillover could occur to domestic firms acquired by foreign multinational firms, domestic firms competing with the foreign multinationals, as well as those sharing vertical production linkages.

- **Foreign acquisition.** The impacts of foreign acquisition on targeted firms have been shown in terms of wage premium, employment growth, and productivity increase. In terms of wage premium, Lipsey and Sjholm (2004) use Indonesian manufacturing firm-level data to show that foreign firms tend to hire more educated workers and pay a wage premium even

> 4 A prominent literature led by Helpman, Melitz and Yeaple (2004) introduces firm heterogeneity into the decision between exports and horizontal FDI and shows that not only are the most productive firms most likely to engage in FDI, FDI sales relative to exports are also larger in sectors with more firm heterogeneity, higher transportation cost, higher tariff, and greater capital intensity. The work by Helpman, Melitz and Yeaple (2004) is extended in numerous studies including, for example, Yeaple (2009) and Chen and Moore (2010).

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