- **Spillover from FDI in service sectors.** While most studies in the literature focus on spillovers from FDI inflows in manufacturing on manufacturing firms, research has also looked at the effects of FDI inflow in service sectors such as banking and telecommunication on manufacturing firms. Fernandes and Paunov (2012) <mark>examine the impact of FDI inflows in producer service sectors on the TFP of Chilean manufacturing firms and show that forward linkages from FDI in services explain 7% of the observed increase in Chile's manufacturing users' TFP. J</mark> avorcik and Li (2013) use data from Romania in 1997 – 2005 and find that an expansion of global retail chains leads to significant TFP increase in the supplying manufacturing sector. Arnold, Javorcik and Mattoo (2011) find a similar result in the Czech Republic and show that the presence of foreign firms in the service sector is associated with greater productivity in the manufacturing sector. A related study by Arnold et al (2016) finds that service reforms in India benefit both foreign and locally owned manufacturing firms, with the effect on the former being larger.

- **Mediating factors.** The existence and the magnitude of productivity spillover could be conditional on a variety of factors such as the absorptive capacity of countries and firms, forms of FDI, and domestic policies. For example, countries and firms with a stronger absorptive capacity such as R&D capacity and relatively skilled labor would be more likely to experience productivity spillovers. For example, Blalock and Gertler (2009) find that Indonesian firms with more R&D, more educated workers, and smaller technology gaps from foreign firms tend to benefit more from FDI. Another study by Javorcik and Spatareanu (2008) finds that ownership structure can also be a mediating factor. They find that vertical spillovers tend to arise from projects with shared domestic and foreign ownership but not from fully foreign owned plants. Du et al. (2012) examine how industrial policy – specifically tariff liberalization and tax subsidies – affects the magnitude and direction of FDI spillovers in China’s manufacturing sector from 1998 through 2007. The study finds that liberalization measures during the critical 1998–2007 period on balance served to enhance productivity growth in Chinese industry. A study by Farole and Winkler (2014), using World Bank Enterprise Surveys data, shows three types of mediating factors: firms’ absorptive capacity, investors’ spillover potential measured by the share of FDI output sold domestically, and host-country institutional factors. Finally, Espitia et al. (2017) show that distance, the level of development of the host country, and institutions are important mediating factors using panel data for 62 countries from 2005 to 2012.

In addition to firm productivity, employment, wage and export performance, the effects of FDI have also been found on domestic investment and innovation, although these aspects have received far less attention. On domestic investment, Wang (2010) uses data from 50 countries over 1970 to 2004 and finds that FDI had a negative contemporaneous effect on domestic investment but a positive cumulative effect on domestic investment. Miun et al (2002) ask a similar question and find mixed results in the Czech Republic, Hungary, and Poland. In Sub-Saharan Africa, Ndikumana et al (2008) find FDI to crowd out domestic investment. On innovation, Cheung et al (2004) find FDI has increased the number of domestic patent applications in China.

Recently, using a large cross-country firm-level data set, Alfaro and Chen (2017) find factor market reallocation in labor and capital markets from less productive to more productive firms accounts for the majority of aggregate productivity gains from foreign multinational competition. Bao and Chen (forthcoming) show another important source of gains from FDI arises from domestic firms’ 8