higher performance levels than domestic firms, being more efficient and productive, in particular. The firms investing in foreign countries therefore have distinctive characteristics that may differ from firms in host countries. FDI is not merely a source of capital, it is also a conduit for technology transfer and human skills augmentation in host countries. As a result, the effect of competition, demonstration and learning-by-doing on local industry may lead to an increase in productivity (Blomstrom and Kokko, 1996; Blomström and Sjöholm, 1999).

Carstensen and Toubal (2006) show that the traditional determinants, such as market potential, low relative unit labor costs, a skilled workforce and relative endowments, have significant and plausible effects. In addition, transition-specific factors, such as the level and method of privatization and country risk, play important roles in determining the flows of FDI into the ―transition economies‖ and help to explain the differing attractiveness of individual countries to foreign investors.

In international trade theories, the main focus is to examine why FDI occurs and how firms choose between exporting, FDI and licensing as an entry mode (Brainard, 1993). Empirical evidence underscores the importance of international trade as a vehicle of international knowledge spillovers to developing countries (Co et al., 1997; Gorg and Strobl, 2005). International trade works as a channel of technology transfer, either through imports of intermediate products and capital equipment or through learning-by-exporting into industrial countries (Jacquemin and Sapir, 1991; Kinoshita, 2001).

Kohpaiboon (2006) examines technology spillover from foreign direct investment (FDI) based on a cross-industry analysis of Thai manufacturing. The analysis is built around the hypothesis of Bhagwati that technology spillover is conditioned by the nature of the trade policy regime. The result, based on a two-equation model that allows for the two-way link between the foreign presence and productivity of locally owned industries, provides support for the hypothesis.

Finally Markusen and Venables (1999) have formally shown how it is possible for FDI to act as a catalyst, leading to the development of local industry through linkage effects.

The endogenous growth model considers FDI and trade as an important source of human capital augmentation, technology change and spillovers of ideas across countries and therefore FDI and trade is expected to have a positive effect on growth (Glass, and Saggi, 1998; Griffith, et al. 2004). The magnitude of spillovers depends on the extent to which local firms respond positively to the technology gap and invest in ̳learning activities‘ (Grossman and Helpman, 1995).

Within the endogenous growth framework, Liu (2008) offers an explanation on how foreign direct investment (FDI) generates externalities in the form of technology transfer. A new insight gained from the theory is that the level and rate effects of spillovers can go in opposite directions. The negative level effect underscores the fact that technology transfer is a costly process—scarce resources must be devoted to learning. The positive rate effect indicates that technology spillovers enhance domestic firms' future productive capacity.

In the model of Wang and Blomstrom (1992), technology transfer channeled through FDI is considered as an endogenized equilibrium phenomenon which results from strategic interaction between foreign firms and local firms.

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