metadata: authors: 0: author: Winkler,Deborah Elisabeth
count: Mozambique,Lesotho,Kenya,Ghana,Chile,Swaziland,Vietnam
docna: 0: docna: Potential and actual FDI spillovers in
            global value chains : the role of foreign investor
            characteristics, absorptive capacity and transmission channels
docty: Policy Research Working Paper
subtopic: Mining & Extractive Industry (Non-Energy),Common Carriers Industry,Food & Beverage Industry,Industrial and Consumer Services and Products,Pulp & Paper Industry,Plastics & Rubber Industry,Agribusiness,Transport and Trade Logistics,Business Cycles and Stabilization Policies
teratopic: Private Sector Development,Macroeconomics and Economic Growth,International Economics and Trade,Finance and Financial Sector Development
abstracts: cdata!: Using newly collected survey data on
            direct supplier-multinational linkages in Chile, Ghana,
            Kenya, Lesotho, Mozambique, Swaziland, and Vietnam, this
            paper first evaluates whether foreign investors differ from
            domestic producers in terms of their potential to generate
            positive spillovers for local suppliers. It finds that
            foreign firms outperform domestic producers on several
            indicators, but have fewer linkages with the local economy
            and offer less supplier assistance, resulting in offsetting
            effects on the spillover potential. The paper also studies
            the relationship between foreign investor characteristics
            and linkages with the local economy as well as assistance
            extended to local suppliers. It finds that foreign investor
            characteristics matter for both. The paper also examines the
            role of suppliers' absorptive capacities in determining
            the intensity of their linkages with multinationals. The
            results indicate that several supplier characteristics
            matter, but these effects also depend on the length of the
            supplier relationship. Finally, the paper assesses whether
            assistance or requirements from a multinational influence
            spillovers on suppliers. The results confirm the existence
            of positive effects of assistance (including technical
            audits, joint product development, and technology licensing)
            on foreign direct investment spillovers, while the analysis
            finds no evidence of demand effects.
geo_reg_key: 119228,517198,517195,1927320,517191
repnme: repnme: Potential and actual FDI spillovers in
            global value chains : the role of foreign investor
            characteristics, absorptive capacity and transmission channels
display_title: Potential and actual FDI spillovers
            in global value chains : the role of foreign investor
            characteristics, absorptive capacity and transmission channels
listing_relative_url: /research/2013/04/17626325/potential-actual-fdi-spillovers-global-value-chains-role-foreign-investor-characteristics-absorptive-capacity-transmission-channels
topicv3: Industrial Clusters and Value Chains
            m1326062 1226,Agribusiness m1326087 1058,Mining Services m1326410 1701,Mining Sector m1327113 554,Global Value Chains m1504237 2603
publishtoextweb_dt: 2013-04-01T00:00:00Z
historic_topic: Private Sector Development,Macroeconomics and Economic Growth,International Economics and Trade,Finance and Financial Sector Development
no_of_pages: 46
author_keys: 0: author_key: 1048582
model_extractions: WPS6424 Policy Research Working Paper 6424 Potential and Actual FDI Spillovers in Global Value Chains The Role of Foreign Investor Characteristics, Absorptive Capacity and Transmission Channels _Deborah Winkler_ The World Bank Poverty Reduction and Economic Management Network International Trade Department April 2013
Policy Research Working Paper 6424

# **Abstract**

Using newly collected survey data on direct suppliermultinational linkages in Chile, Ghana, Kenya, Lesotho, Mozambique, Swaziland, and Vietnam, this paper first evaluates whether foreign investors differ from domestic producers in terms of their potential to generate positive spillovers for local suppliers. It finds that foreign firms outperform domestic producers on several indicators, but have fewer linkages with the local economy and offer less supplier assistance, resulting in offsetting effects on the spillover potential. The paper also studies the relationship between foreign investor characteristics and linkages with the local economy as well as assistance extended to local suppliers. It finds that foreign investor characteristics matter for both.

The paper also examines the role of suppliers’ absorptive capacities in determining the intensity of their linkages with multinationals. The results indicate that several supplier characteristics matter, but these effects also depend on the length of the supplier relationship. Finally, the paper assesses whether assistance or requirements from a multinational influence spillovers on suppliers. The results confirm the existence of positive effects of assistance (including technical audits, joint product development, and technology licensing) on foreign direct investment spillovers, while the analysis finds no evidence of demand effects.

This paper is a product of the International Trade Department, , Poverty Reduction and Economic Management Network. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank. org. The author may be contacted at dwinkler2@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Potential and Actual FDI Spillovers in Global Value Chains**

**The Role of Foreign Investor Characteristics, Absorptive Capacity and**

## **Transmission Channels**

### **Deborah Winkler**<sup>*****</sup>

Key words: Foreign direct investment, vertical spillovers, linkages, global value chains, foreign firm characteristics, absorptive capacity, transmission channels, agribusiness, apparel, mining.

JEL: F1, F2

> * Consultant Economist, International Trade Department, Poverty Reduction and Economic Management Network, World Bank, 1818 H St NW, Washington, DC 20433, USA. Email: dwinkler2@worldbank.org. This paper is part of a wider study on the spillover effects of foreign direct investment and their mediating factors conducted by the International Trade Department of the World Bank. The author would like to thank Beata Javorcik for her guidance and excellent suggestions throughout the project and Thomas Farole for valuable comments and discussions. This research was funded through a grant from the Bank-Netherlands Partnership Program (BNPP). The views expressed in this paper are those of the author and should not be attributed to the World Bank, its Executive Directors or the countries they represent.
# **1 Introduction**

Most countries devote considerable attention and resources to attracting foreign direct investment (FDI). This is done in the hope not only of generating benefits like jobs, foreign exchange, and tax revenues, but perhaps more importantly in realizing dynamic benefits to the domestic economy through so-called “spillovers” from FDI. These “spillovers” generally refer to productivity improvements resulting from knowledge diffusion from multinational affiliates to domestic firms – both in the form of unintentional transmission or intentional transfer if the multinational is not compensated for by the domestic firm – encompassing both technology and all forms of codified and ‘tacit knowledge’ related to production, including management and organizational practices. The existence of spillovers is based on the assumption that multinational firms enjoy technological and other advantages and have, therefore, higher levels of productivity (Hoekman and Javorcik 2006).

Numerous econometric studies show ambiguous effects of FDI on domestic firm productivity within the same sector, also known as horizontal spillovers (see, e.g., extensive literature reviews in Görg and Greenaway 2004; Lipsey and Sjöholm 2005; Smeets 2008, among others). Other studies have shifted the focus to vertical spillovers to domestic firms in upstream and downstream sectors (e.g., Javorcik 2004, Blalock and Gertler 2008, Havranek and Irsova 2011). These studies support the existence of positive backward spillovers from multinationals on local suppliers, while evidence on forward spillovers is mixed.

Significant policy relevant research gaps remain, as identified in a recent survey of the empirical literature (Javorcik 2009). Among the gaps identified, there is the need to (i) determine the conditions under which spillovers are likely to materialize; (ii) understand more specifically the mechanisms behind the observed patterns; and (iii) extend the scope of investigations beyond the manufacturing sector (Javorcik 2009). The second research gap is also a function of the FDI measure being used. The econometric studies above, for example, measure FDI only at the broad sectoral level, but don’t include direct supplier relationships with multinational firms which are based on survey data and could reveal the exact underlying mechanisms (Javorcik and Spatareanu 2009).

Using newly collected survey data on direct supplier-multinational linkages in Chile, Ghana, Kenya, Lesotho, Mozambique, Swaziland, and Vietnam, this paper addresses these research gaps as follows. We first evaluate whether foreign investors differ from domestic producers in terms of 2
their overall performance, linkages with the local economy, and supplier assistance which all influence the firms’ potential to generate productivity spillovers. Second, we also study the relationship between foreign investor characteristics and linkages with the local economy as well as assistance extended to local suppliers. In the second part of the paper, we shift the focus to domestic suppliers and examine the role of supplier firm characteristics – the so-called absorptive capacities – for their linkages with multinationals. Fourth, focusing on assistance and demand effects, we assess how factors within the transmission channels between multinationals and local suppliers affect FDI spillovers.

Studies on FDI spillovers that focus on direct supplier-multinational linkages based on foreign investor or supplier survey data are rare. Focusing on foreign affiliates in five transition economies, Giroud, Jindra and Marek (2012) find that foreign firm characteristics have a positive impact on backward FDI linkages and spillovers. Javorcik and Spatareanu (2009) find evidence of “learningby-supplying” for a sample of Czech manufacturing firms, although there is also evidence of selfselection into supplying due to a higher productivity ex ante. Jordaan (2011) also confirms the existence of positive backward spillovers on manufacturing suppliers in Mexico. Specifically, positive spillovers are facilitated through supplier firms’ absorptive capacities and the level of support from the multinational. Studying the Polish automotive sector, Gentile-Lüdecke and Giroud (2012) examine the mechanisms behind knowledge spillovers of suppliers. While the authors don’t find evidence of a supporting role of suppliers’ absorptive capacities on knowledge acquisition, they find evidence of a supportive role on performance improvement and new knowledge creation.

This study is structured as follows. The next section provides a literature review that identifies major foreign investor characteristics and suppliers’ absorptive capacities which have shown to influence FDI spillovers. It also discusses the main transmission channels through which FDI spillovers can be generated. Section 3 compares foreign investors and domestic producers in terms of their potential to generate productivity spillovers and also studies the role of foreign investor characteristics for their FDI spillover potential. Section 4 then evaluates the role of suppliers’ absorptive capacities for FDI linkages, while section 5 analyzes various factors within the transmission channels between suppliers and multinationals that increase FDI spillovers. Section 6 concludes.

3
# **2 Literature Review**

## **2.1 Foreign Investor Characteristics**

The degree of _foreign ownership_ affects local firms’ potential to absorb FDI spillovers. A higher share of foreign ownership, and, thus, larger control over management and lower potential for knowledge leakages, correlates positively with the parent firm’s incentive to transfer knowledge, e.g., in the form of technology which has been confirmed by empirical studies for Greece (Dimelis and Louri 2002) and Indonesia (Taaki 2005). On the other hand, a larger domestic ownership share could also be beneficial for local firms, since the foreign investor’s interests are less-well protected making technology leakages more likely (demonstration effect). A larger domestic participation might further increase the likelihood to rely on domestic suppliers (Crespo and Fontoura 2007). Toth and Semjen (1999) confirm that a larger domestic ownership share led to more inter-sectoral linkages (reported in Crespo and Fontoura 2007).

Empirical studies controlling for different _structures of foreign ownership_ tend to support the more positive spillover effects of joint ventures. Explanations include the possibility of more vertical linkages as well as stronger technology leakages for partially-owned foreign firms (Javorcik and Spatareanu 2008). For example, Havranek and Irsova (2011) find evidence of lower spillovers in fully-owned foreign affiliates, and Javorcik (2004) and Javorcik and Spatareanu (2008) find a positive vertical spillover effect on domestic firms in supplying industries from multinationals with partial foreign ownership, but not from multinationals with full foreign ownership. Abraham et al. (2010) find for a sample of Chinese manufacturing firms that foreign ownership in a domestic firm’s sector only results in positive horizontal spillovers when foreign ownership is organized as a joint-venture. By contrast, the presence of fully-owned foreign firms is found to have a negative impact on local firms, due to technology intensity of multinationals crowding-out local producers within the same sectors (Abraham et al. 2010).

In addition, the _length of foreign presence_ of a multinational in the host country also influences FDI spillovers. Focusing on FDI spillovers from old versus new firms in 17 Central and Eastern Europe transition economies, Turkey and the Commonwealth of Independent States, Gorodnichenko, Svejnar, and Terrell (2007), for example, find significantly positive forward and horizontal FDI spillovers from older firms (i.e. firms that were established before 1991), while these effects cannot be confirmed for newer firms (i.e. firms that were established in or after 1991).

4
FDI spillovers also depend on the _technology intensity_ of the multinational’s goods produced in the host country. More technology- or R&D-intensive products generally contain a greater element of knowledge and broader set of skills. However, the production of high-tech products might also involve low-tech processes which could offset this effect (Paus and Gallagher 2008). Focusing on FDI in technology-intensive industries, Buckley, Wang, and Clegg (2007) find positive spillovers on Chinese firms to be stronger if originated by Western-owned multinationals compared to affiliates from Taiwan, China; Hong Kong SAR, China; and Macau which they relate to the higher technology intensity in Western-owned affiliates. Analogously, Lin, Liub, and Zhanga (2009) the positive horizontal and vertical spillovers for FDI from other countries, while FDI from Taiwan, China; Hong Kong SAR, China; and Macao, results in positive forward FDI spillovers only, but in no backward spillovers and negative horizontal FDI spillovers. This is also explained with the more laborintensive nature of foreign affiliates from Taiwan, China; Hong Kong SAR, China; and Macao (Lin et al. 2009).

Related to the previous is the _FDI home country_ which may have an effect on the production strategy pursued and on the technologies used in host countries, but may also have other effects on the spillover potential. The home country of FDI influences managerial practices and cultures which are related to differences in the use of expatriate workers, attitudes and strategies to the training of local workers and general skills development. Further, end market segmentation – closely linked to FDI home countries through historical, cultural and language ties, as well as trade policies – is a common practice. In the apparel sector, for example, European-owned firms in the apparel sector in Mauritius and Madagascar largely export to Europe whereas Asian owned firms serve the U.S. market (Gibbon 2003, 2008; Staritz and Morris 2012). These patterns impact on spillover potential, as buyer sourcing requirements and practices can vary considerably by market. Moreover, production for one specific market may bring a firm set up and an overhead structure that is uncompetitive for other markets (Gibbon 2003, 2008).

Analogously, a multinational firm’s _sourcing strategy_ may affect the FDI spillover potential. If a multinational firm sources on a global scale, it may follow a co-sourcing strategy, resulting in an increased reliance on imported inputs from established suppliers abroad. Alternatively, a multinational firm might follow co-location strategies requiring an established foreign input supplier to also enter the host country. Both could render the entrance of new local suppliers more difficult. This is particularly common for multinationals in the clothing, footwear, electronics and automotive sector (Paus and Gallagher 2008). Moreover, the share of intermediates sourced locally by multinationals is likely to increase with the distance between the host and the source economy.

5
It is also likely to be larger for multinationals originating in countries outside the preferential trade agreement to which the host country belongs, as it makes imports from the home country less attractive (Javorcik and Spatareanu 2011).

Different _motivations_ for undertaking FDI – i.e. market-seeking, cost-seeking, resource-seeking, and asset-seeking – are likely to mediate spillover potential. The conventional wisdom is that resource-seeking FDI has less potential for spillovers, due to its capital and technology intensity and limited time horizons. By contrast, it is often considered that FDI in the manufacturing sector has higher spillover potential as it is largely driven by efficiency-seeking motives. Indeed, the more labor-intensive nature of manufacturing investment, its requirements for a broad range of goods and services inputs, and the lower barriers to domestic forward linkages (relative to resourceseeking FDI), make it a strong candidate for contributing spillovers. Market-seeking FDI, in particular in retail, is also considered as providing higher spillover potential as retailers tend to source from local producers, in particular for food and other perishable products. However, evidence remains ambiguous, suggesting that the situation may be context-specific.

# **2.2 Absorptive Capacities**

The _technology gap_ of domestic firms has been identified as one the most important mediating factors for FDI spillovers (Kokko 1994; Kokko, Tansini, and Zejan 1996; Grünfeld 2006)<sup>2</sup> . Views on the role of the technology gap for FDI spillovers conflict. Some studies find that a large technology gap is beneficial for local firms since their catching-up potential increases (Findlay 1978; Wang and Blomström 1992; Smeets 2008). Other studies argue that local firms might not be able to absorb positive FDI spillovers if the technology gap between the multinational and local producers is too big or too small (e.g. Blalock and Gertler 2009).

The literature suggests that there is solid evidence of the supportive role of _research and development_ ( _R&D_ ) in local firms in high income countries, e.g. Spain (Barrios and Strobl 2002; Barrios, Dimelis, Louri, and Strobl 2004), the US (Keller and Yeaple 2009), Ireland (Barrios et al. 2004), and Sweden (Karpaty and Lundberg 2004), among others. There are also studies confirming the supportive role of R&D in domestic firms for developing or emerging countries, including the Czech Republic (Kinoshita 2001), India (Kanturia 2000, 2001, 2002), Hungary and Slovakia (Damijan, Knell, Majcen, and Rojec 2003), and Indonesia (Blalock and Gertler 2009) among others.

> 2 The technology gap is usually measured as a domestic firm’s productivity level relative to a benchmark productivity level within the same sector – often of the leading firms (Griffith, Redding, and Simpson 2002; Girma 2005; Girma and Görg 2007) or of foreign firms (Castellini and Zanfei 2003).

6
One exception is Damijan et al. (2003) finding a negative role of firm-level R&D on FDI spillovers for Estonia and Latvia (reported in Crespo and Fontura 2007). Gentile-Lüdecke and Giroud (2012) find no impact of suppliers’ R&D intensity on their knowledge acquisition from multinationals, but on local suppliers’ new knowledge creation in terms of new products, services and technologies.

A domestic firm’s ability to absorb foreign technology might also be positively related to its share of _skilled labor_ . Blalock and Gertler (2009), for example, find that the proportion of employees with college degrees significantly increases domestic firms’ productivity gains from FDI in Indonesian manufacturing. However, Girma and Wakelin (2007) only confirm such a finding for smaller firms in the U.K. – they find that FDI does not affect large firms with a high proportion of human capital, as these firms are probably the most similar to multinationals in terms of technology and market share. In contrast, Sinani and Meyer (2004) find for a sample of Estonian firms that a larger share of human capital reduces the positive spillover effects for domestic firms, but increases it for large firms. Their explanation for this contradicting result is that the competition effect might reduce workers’ possibility to extract additional rents from local firms, since multinationals tend to pay better wages. The competition effect might also enable larger firms to keep skilled workers compared to smaller firms who might lose skilled workers to foreign firms.

_Firm size_ has been positively related to a domestic firm’s capacity to absorb FDI spillovers (e.g. Jordaan 2011 for Mexico). Larger firms may be better positioned to compete with multinationals and to imitate their tools (Crespo and Fontoura 2007). Analogously, larger firms may pay better wages and therefore find it easier to attract workers employed by multinational firms. Larger firms might also be more visible, e.g. organized in associations, and, thus, more likely selected as local suppliers by foreign firms. While Aitken and Harrison (1999) find negative spillovers from FDI on domestic plants in Venezuela, these effects are only significant for firms with less than 50 employees. This suggests that smaller firms are less competitive and less capable of absorbing positive spillover effects. In contrast, other studies find that small and medium-sized firms benefit more strongly from FDI spillovers, especially those firms with a higher proportion of skilled labor (e.g. Girma and Wakelin 2007; Sinani and Meyer 2004). Gentile-Lüdecke and Giroud (2012) also find evidence of a negative effect of firm size on knowledge acquisition from multinationals for suppliers in the Polish automotive sector.

_Exporting_ has been linked to a domestic firm’s absorptive capacity for at least two reasons. First, local exporting firms are generally characterized by a higher productivity, be it via learningby-exporting or self-selection into exporting, rendering them more competitive to bear up against 7
negative rivalry effects created by multinationals (Crespo and Fontoura 2007). Second, the more a local firm exports, the lower will competitive pressures from multinational firms be felt (assuming that the multinational firm does not enter the same export market), hence, the incentive to improve, which lowers the extent of positive FDI spillovers. However, studies show no clear evidence whether exporting increases or lowers the productivity gains from FDI. While several studies find evidence of lower productivity gains for exporters (e.g. Blomström and Sjöholm 1999, Ponomareva 2000, Sinai and Meyer 2004, Abraham et al. 2010, and Du, Harrison, and Jefferson 2011). In contrast, some studies find that the gains from FDI are larger for exporting firms (e.g. Barrios and Strobl 2002, Schoors and van der Tol 2002, Lin at al. 2009, Jordaan 2011).

Several aspects of domestic firm _location_ have been shown to be important for the extent of productivity spillovers from FDI. Barrios, Luisito, and Strobl (2006) find evidence that foreign firms collocating (agglomeration) in the same sector and region significantly increase productivity and employment of local manufacturing firms in Ireland. Some studies contest the positive role of agglomeration for a firm’s absorptive capacity. For example, while Sjöholm (1999) confirms positive spillover effects when FDI is measured at the country-sector level in Indonesia, he finds negative spillovers when foreign presence is measured at the region-sector level. Aitken and Harrison (1999) and Yudaeva, Kozlov, Malentieva, and Ponomareva (2003) find similar results for Russia.

Besides agglomerations, studies have focused on other aspects of location. Firm location in special economic zones, for example, can have a negative impact on FDI spillovers if the zone focuses on export processing combined with a high percentage of imported inputs (Abraham et al. 2010). More regional development (e.g. Ponomareva 2000, Torlak 2004, Girma 2005, Girma and Wakelin 2007) and a domestic firm’s geographical proximity to multinational firms (Girma and Wakelin 2007, Resmini and Nicolini 2007) seem to have a positive effect.

# **2.3 Transmission Channels**

Understanding the transmission channels and mechanisms through which FDI spillovers can be generated in the first place is important when exploring how such spillovers are shaped by mediating factors. In the FDI literature, several channels for spillovers are identified (Hoekman and Javorcik 2006; Crespo and Fontoura 2007; among many others). These can be categorized in three main channels: (i) changing market forces (i.e. competition and demonstration effect), (ii) labor 8
turnover, and (iii) value chains (i.e. demand and assistance effect, diffusion effect, availability and quality effect). The focus of this paper is on value chains.<sup>3</sup> Spillovers through global value chains emerge, e.g., when local firms become input or service suppliers of multinational firms. Specifically, FDI spillovers can be generated through the demand of multinationals for better and/or more diverse inputs ( _demand effect_ ). Hereby, multinational affiliates might help local producers to upgrade their technological capabilities directly through sharing of production techniques and product design and assisting with technology acquisition ( _assistance effect_ ) (Paus and Gallagher 2008). Spillovers to supplying industries may also be generated through personnel training, advance payment, leasing of machinery, provision of inputs, help with quality assurance and organization of product lines (Lall 1980; Crespo and Fontoura 2007; Javorcik 2008).

While the demand and assistance effects are intentional, unintentional knowledge spillovers can occur, e.g., through technology leakages to other supplying firms in the sector ( _diffusion effect_ ). Finally, while the previously described effects refer to backward spillovers from multinationals to suppliers, there is also the case where a multinational firm supplies to a local producer in downstream sectors. This increases the availability, variety, and reliability of higher-quality inputs ( _availability and quality effects_ ) (Javorcik 2008). Given our data sample which covers surveys of suppliers that produce inputs for multinationals, we are only able to examine demand and assistance effects in the following.

# **3 Which Foreign Investor Characteristics Increase the FDI Spillover Potential?**

This section focuses on the role of foreign investor characteristics for the FDI spillover potential. Section 3.1 presents the dataset being used in this section. Section 3.2 evaluates if there are differences between foreign investors and domestic producers in terms of their potential to generate positive spillovers. Section 3.3 examines if there are differences in the extent of FDI spillover potential between different groups of foreign investors, depending on their characteristics.

> 3 Note that the general managers experience in other foreign-owned firms at home or abroad in the strict sense could also be considered part of the transmission channel “labor turnover“.

9
# **3.1 Data**

The surveys, which form the basis for this paper, have been developed as part of a project by the International Trade Department of the World Bank which aims to assist low-income countries (LICs), particularly from Sub-Saharan Africa (SSA), to take better advantage of spillovers from FDI within the context of global value chains. Specifically, the project aims to identify the critical factors for the realization of FDI-related spillovers – including dynamic interactions between FDI and local suppliers.

Acknowledging that the extent and nature of potential FDI-generated spillovers differ importantly by sector and FDI motive, the project focuses not exclusively on manufacturing but includes, besides light manufacturing (apparel) two natural resources-based sectors which are particularly relevant for SSA LICs: mining and agribusiness. Given the share of FDI that goes into natural resources-intensive sectors, particularly in developing countries, understanding better the unique dynamics of FDI linkages and spillovers in sectors like agribusiness and mining represents an important opportunity. In addition, the study includes benchmark countries for these two sectors – Chile (for mining) and Vietnam (for agribusiness) – to be compared with the SSA countries.

Between March and October 2012, three different types of firms have been surveyed by various consultants, namely (i) national suppliers, i.e. firms with a national ownership of at least 75 percent that supply to multinationals in the country, (ii) foreign investors, i.e. firms that have a foreign ownership share of at least 25 percent, and (iii) national producers, i.e. domestic firms that are final goods producers and have a national ownership of at least 75 percent. In cases where reported data seemed unlikely, either consultants or the firms themselves were contacted again to make sure we obtained the correct numbers.

The focus of this section is on foreign investors, but we also compare their characteristics with domestic producers. The foreign investors’ surveys cover 87 firms in Chile (5), Ghana (16), Kenya (20), Lesotho (15), Mozambique (10), Swaziland (11) and Vietnam (10). Table 1 shows that the majority of foreign investors are in apparel (43), followed by agribusiness (30) and mining (14). Domestic producers’ surveys cover 64 firms in Chile (5), Ghana (10), Kenya (26), Mozambique (6) and Vietnam (17). The majority of these firms are in agribusiness (46), followed by apparel (13) and mining (5).

10
**Table 1: Number of Firms by Type of Firm and Sector**

|**Type **|**Sector**|**No. of firms**|**%**|
|---|---|---|---|
|Foreign investor|Agribusiness|30|34.5%|
|Foreign investor|Apparel|43|49.4%|
|Foreign investor|Mining|14|16.1%|
|_Foreign investor_|_All sectors_|_87_|_100.0%_|
|Domestic producer|Agribusiness|46|71.9%|
|Domestic producer|Apparel|13|20.3%|
|Domesticproducer|Mining|5|7.8%|
|_Domestic producer_|_All sectors_|_64_|_100.0%_|

# **3.2 Differences between Foreign Investors and Domestic Producers**

In this section, we assess if foreign investors are different from domestic producers in terms of their potential to generate positive spillover effects for domestic suppliers. In the following, we look at three types of indicators that all influence the spillover potential, namely the firms’ overall performance, their linkages with the local economy, and supplier assistance.

## **_Performance Indicators_**

Table 2 (column 1) shows the mean differences, controlling for country-sector fixed effects. Column (2) additionally controls for employment, since firm size may also explain some of the differences between multinationals and domestic producers. All variables refer to FY 2012. The summary statistics for both foreign investors and domestic producers can be found in Appendix 1.

The results indicate that multinationals sell significantly more than domestic suppliers (ln _sales_ ), although the effect becomes smaller when controlling for firm size. Foreign firms are also more productive (ln _labprod_ ), and this effect is slightly larger when we additionally control for firm size. They also have a smaller technology gap ( _tech_ ) to the leading domestic competitor (i.e. domestic producers generally lag further behind the domestic leader in the sector) which could be the result of being more productive.

The positive coefficient sign on the share of workers with tertiary education ( _emp_ter_ ) and the negative coefficient sign on the share of workers with secondary education ( _emp_sec_ ) seem to indicate that foreign firms have a labor force that is more skilled, although the effects are not significant. Foreign firms are more likely to export ( _exporting_ ). The share of direct exports is clearly 11
higher for foreign firms ( _expsh_dir_ ), while the share of direct exports shows a negative coefficient sign, but has no statistically significant impact.

In sum, we find that foreign investors tend to outperform domestic producers in terms of sales, firm size, productivity, technology gap, exporting behavior, and direct export share. This would imply a higher knowledge and productivity spillover potential compared to domestic firms.

**Table 2: Performance Indicators, Foreign Investors vs. Domestic Producers (Mean Difference)**

|**Variable**|**Definition**|**Difference**<br>**(1)**|**Additional**<br>**controls for**<br>**ln****_emp_**<br>**(2)**|
|---|---|---|---|
|ln_sales_|Firm's sales (USD) in natural logarithms|2.5893***<br>(0.000)|2.1162***<br>(0.000)|
|ln_age_|Number of years since firm has started operations in|-0.1429|-0.2192|
||natural logarithms|(0.389)|(0.233)|
|ln_emp_|Firm’s number of employees in natural logarithms|0.3410|n.a|
|||(0.270)|n.a.|
|ln_labprod_|Firm's sales per number of employees (USD) in natural|1.9528***|2.1162***|
||logarithms|(0.000)|(0.000)|
|_tech_|Technology gap between firm and its leading domestic|-0.4982***|-0.6094***|
||competitor in the same sector, where 1 means “not existent”<br>and 4 means “large”|(0.003)|(0.000)|
|_emp_ter_|Percentage of workers with tertiary education in the firm's|6.5680|8.9122|
||workforce|(0.262)|(0.106)|
|_emp_sec_|Percentage of workers with secondary education in the firm's|-6.7298|-7.8271|
||workforce|(0.315)|(0.225)|
|_export_|Dummy taking the value of 1 if a firm exports, and 0 otherwise|0.6418**|0.5233*|
|||(0.025)|(0.083)|
|_expsh_dir_|Percentage of direct exports of firm's total sales|35.7146***<br>(0.000)|33.3476***<br>(0.000)|
|_expsh_ind_|Percentage of indirect exports of firm's total sales|-1.6483|-4.8535|
|||(0.681)|(0.206)|

Source: Own calculations. p*<0.1, p**<0.05, p***<0.01 (p-values in parentheses). Note: Variables refer to FY 2012. All regressions control for country-sector fixed effects. Standard errors are robust to heteroscedasticity.

# **_Linkages with the Local Economy_**

Table 3 compares foreign investors’ and domestic producers’ linkages with the local economy. Linkages are measured in terms of the share of domestic inputs and workers as well as a firm’s percentage of sales going to the domestic market. All are expected to increase the potential of positive spillovers for local suppliers (see section 2.1). We also examine differences between types of inputs and workers. We follow the specification of the previous section. All variables refer to FY 12
2012. The summary statistics for both foreign investors and domestic producers are shown in Appendix 2.

Foreign investors source a lower share of their total inputs from domestic suppliers ( _inp_dom_ ) compared to domestic producers. We also evaluate if foreign investors and domestic producers differ in terms of their sourcing patterns. Foreign investors source a significantly lower share of raw materials ( _inp_dom_mat_ ) and equipment and machinery ( _inp_dom_equip_ ) as percentage of their total domestic inputs compared to domestic producers. On the other hand, their share of technical services ( _inp_dom_tech_ ) as well as transport, security, cleaning, catering, and other services ( _inp_dom_oth_ ) is significantly larger in comparison with domestic producers.

We now focus on the firms’ use of local workers. Foreign firms clearly employ a lower share of domestic workers ( _emp_dom_ ) than domestic producers. The differences are slightly larger when we control for firm size (column 2). These differences are no longer statistically significant if we differentiate between types of workers by educational level. As could be expected, foreign investors significantly make less use of domestic managers ( _man_dom_ ) compared to domestic producers. While the coeffient signs are consistently negative for supervisors ( _super_dom_ ) and technical positions ( _tech_dom_ ), they narrowly miss the threshold of statistical significance.

Finally, we also look at forward linkages, measured as a firm’s percentage of sales going to the domestic market ( _market_ ). The results show unambiguously that foreign investors sell a lower percentage to the local market than domestic producers.

In sum, foreign investors are characterized by fewer linkages with the local economy, as they make less use of domestic workers and inputs and also sell a lower share of their output to the domestic market. However, the findings also show that certain service inputs, namely technical services and transport, security, cleaning, catering, and other services, show a higher potential for linkages.

13
**Table 3: Linkages, Foreign Investors vs. Domestic Producers (Mean Difference)**

|**Variable**|**Definition**|**Difference**<br>**(1)**|**Additional**<br>**controls for**<br>**ln****_emp_**<br>**(2)**|
|---|---|---|---|
|**Inputs**||||
|_inp_dom_|Percentage of inputs sourced from domestic suppliers<br>in the firm's total inputs|-16.0734***<br>(0.008)|-12.4843**<br>(0.043)|
|_inp_dom_mat_|Percentage of raw materials from domestic firms of firm's|-16.1221***|-12.4158**|
||total input purchases from domestic firms|(0.002)|(0.029)|
|_inp_dom_comp_|Percentage of parts and components from domestic|-0.1020|-0.3504|
||firms of firm's total input purchases from domestic firms|(0.938)|(0.807)|
|_inp_dom_pack_|Percentage of packaging from domestic firms of firm's|3.7895|5.6411|
||total input purchases from domestic firms|(0.331)|(0.201)|
|_inp_dom_equip_|Percentage of equipment and machinery from domestic|-5.0125**|-5.0252**|
||firms of firm's total input purchases from domestic firms|(0.025)|(0.041)|
|_inp_dom_bus_|Percentage of business services from domestic firms of firm's|0.7942|-0.1636|
||total input purchases from domestic firms|(0.693)|(0.940)|
|_inp_dom_tech_|Percentage of technical services from domestic firms of|3.7713**|3.7013**|
||firm's total input purchases from domestic firms|(0.018)|(0.031)|
|_inp_dom_oth_|Percentage of transport, security, cleaning, catering, and|13.9780***|9.5439***|
||other services from domestic firms of firm's total input<br>urchases from domestic firms|(0.000)|(0.001)|
|**Labor**|p|||
|_emp_dom_|Percentage of domestic workers in the firm's total|-4.0758***|-4.4249***|
||workforce|(0.002)|(0.002)|
|_emp_ter_dom_|Percentage of domestic workers with tertiary education|2.8700|4.1928|
||in the firm's workforce|(0.613)|(0.445)|
|_emp_sec_dom_|Percentage of domestic workers with secondary education in|-7.6005|-8.0573|
|||(0.261)|(0.225)|
|_emp_oth_dom_|Percentage of other domestic workers in the firm's|-0.1145|-0.7786|
||workforce|(0.986)|(0.906)|
|_man_dom_|Percentage of domestic managers of firm's total managers|-15.5842***|-16.4872***|
|||(0.000)|(0.000)|
|_super_dom_|Percentage of domestic supervisors of firm's total|-6.6335|-8.5360|
||supervisors|(0.181)|(0.100)|
|_tech_dom_|Percentage of technical positions of firm's total technical|-5.9357|-5.8431|
||positions|(0.159)|(0.185)|
|**Output**||||
|_market_|Percentage of sales to domestic market of firm's total sales|-34.0663***|-28.4941***|
|||(0.000)|(0.001)|

Source: Own calculations. p*<0.1, p**<0.05, p***<0.01 (p-values in parentheses). Note: Variables refer to FY 2012. All regressions control for country-sector fixed effects. Standard errors are robust to heteroscedasticity.

14
# **_Supplier Assistance_**

Finally, we also assess if there are differences between foreign investors and domestic producers in terms of their supplier assistance, as assistance increases the FDI spillover potential (as discussed in section 2.3). For each indicator we measure the probability of assisting suppliers, which takes the value of 1 if a firm offers assistance, and 0 otherwise. The data do not allow us to identify when and how often supplier assistance took place. The summary statistics for both foreign investors and domestic producers can be found in Appendix 3.

The negative coefficient signs in Table 4 suggest that foreign investors seem to offer less assistance to local suppliers than domestic producers, although the effects are only significant for five types of assistance, namely (i) help with organization of production lines ( _assist_orga_ ), (ii) help with quality assurance ( _assist_qual_ ), (iii) help with the supplier’s business strategy ( _assist_strat_ ), (iv) help with finding export opportunities ( _assist_exp_ ) which is only significant if we control for firm size (column 2), and (v) help with implementing health, safety, environmental, and/or social conditions ( _assist_hse_ ).

In sum, foreign investors outperform domestic producers in terms of sales, firm size, productivity, exporting behavior, and direct export share. While this would imply a higher knowledge and productivity spillover potential compared to domestic firms, foreign investors have fewer linkages with the local economy in terms of using domestic inputs and workers. There is also some evidence that foreign firms offer less assistance to local suppliers. Fewer linkages and less supplier assistance both can limit the positive impact from FDI.

15
**Table 4: Supplier Assistance, Foreign Investors vs. Domestic Producers (Mean Difference)**

|**Variable**|**Definition**|**Difference**|**Additional**|
|---|---|---|---|
|||**(1)**|**controls for**<br>**ln****_emp_**<br>**(2)**|
|_assist_|Dummy taking the value 1 if firm offered assistance to|-0.1725|-0.2994|
||domestic suppliers, and 0 otherwise|(0.636)|(0.437)|
|_assist_pay_|Advance payment|-0.4019|-0.2117|
|||(0.203)|(0.523)|
|_assist_impr_|Provision of financing for improvements|-0.3675|-0.4821|
|||(0.155)|(0.081)|
|_assist_funds_|Support to get funds from other sources|-0.0831|-0.1474|
|||(0.747)|(0.587)|
|_assist_plan_|Financial planning|-0.1670|-0.1160|
|||(0.522)|(0.669)|
|_assist_inp_|Provision of inputs|-0.1683|-0.1846|
|||(0.509)|( 0.496)|
|_assist_sourc_|Support for sourcing raw materials|-0.2125|-0.1645|
|||(0.405)|(0.544)|
|_assist_train_|Training of workers|0.0801|0.0111|
|||(0.760)|(0.968)|
|_assist_equip_|Lending/leasing of machines or equipment|-0.0590|0.0247|
|||(0.827)|(0.931 )|
|_assist_tech_|Product or process technologies|-0.1584|-0.3123|
|||(0.546)|(0.302)|
|_assist_maint_|Repair/maintenance of machines|-0.1376|-0.1472|
|||(0.620)|(0.619 )|
|_assist_license_|Licensing of patented technology|-0.0022|0.0006|
|||(0.994)|(0.999 )|
|_assist_orga_|Help with organization of production lines|-0.5224**|-0.6778**|
|||(0.046)|(0.024)|
|_assist_qual_|Help with quality assurance|-0.5166*|-0.5547*|
|||(0.060)|(0.057)|
|_assist_invent_|Help with inventory control|0.0303|0.0262|
|||(0.907)|(0.925)|
|_assist_audit_|Help with audits|-0.1651|-0.1779|
|||(0.536)|(0.538)|
|_assist_strat_|Help with business strategy|-0.6606**|-0.7690***|
|||(0.012)|(0.007)|
|_assist_exp_|Help with finding export opportunities|-0.4629|-0.5017*|
|||(0.101)|(0.089)|
|_assist_hse_|Help with implementing health, safety, environmental,|-0.6467**|-0.6589**|
||and/or social conditions|(0.017)|(0.024)|

Source: Own calculations. p*<0.1, p**<0.05, p***<0.01 (p-values in parentheses). Note: All regressions control for country-sector fixed effects. Standard errors are robust to heteroscedasticity.

16
# **3.3 Premia by Foreign Investor Characteristics**

The analysis in the previous section treated foreign firms as homogenous. The literature survey in section 2.1, however, showed that certain types of FDI seem to be more beneficial than others since actual FDI spillovers also depend on foreign firm characteristics. In this section, we therefore split the foreign investors into several groups to investigate if firms with certain characteristics have a larger FDI spillover potential than others.

We estimate the following equation: where subscript _i_ stands for firm, _s_ for the firm’s sector, and _c_ for country. α 0 designates the constant, _Dcs_ country-sector fixed effects, and ε _isc_ the idiosyncratic error term. _FC_ is a vector representing several foreign firm characteristics which take the value of 1 if a foreign investor fulfills a certain characteristic, and 0 otherwise. _potential_ is our measure of FDI spillover potential. Building on the theoretical discussion in section 2.1, we include the foreign investor characteristics shown in Table 5. The summary statistics are presented in Appendix 4.

**Table 5: Foreign Investor Characteristics, Definition**

|**Variable**|**Definition**|
|---|---|
|_own_|A firm’s percentage of foreign ownership|
|_age_fdi_|Number of years since a multinational has started its operations in the host country|
|_tech_|A foreign firm’s technology gap with its leading domestic competitor in the same sector, where 1<br>means “not existent” and 4 means “large”|
|_origin_SSA_|Dummy taking the value of 1 if the largest foreign investor’s region of origin is SSA, and 0 otherwise|
|_origin_Asia_|Dummy taking the value of 1 if the largest foreign investor’s region of origin is Asia (including South<br>Asia) and 0 otherwise|
|_motive_market_|Importance of access to (local and regional) markets, where 1 means “not important” and 4 means<br>“very important”|
|_motive_cost_|Importance of access to reduced labor and non-labor related costs, where 1 means “not important”<br>and 4 means “very important”|
|_motive_res_|Importance of access to raw materials and specific inputs, where 1 means “not important” and 4<br>means “very important”|
|_motive_asset_|Importance of access to skills and technology, where 1 means “not important” and 4 means “very<br>important”|

We apply four FDI spillover potential measures related to a foreign firm’s linkages with and assistance to domestic suppliers, as these are the categories where foreign firms lag behind domestic producers: (i) the percentage of purchased goods and services sourced from domestic 17
suppliers ( _inp_dom_ ), (ii) the percentage of domestic workers in the firm’s total workforce ( _emp_dom_ ), (iii) the percentage of sales to the domestic market ( _market_ ), and (iv) the likelihood of supplier assistance ( _assist_ ). While foreign investor characteristics refer to FY 2012, we don’t know when supplier assistance took place. However, it is relatively safe to assume that major foreign characteristics remained constant over time.

Table 6 shows the descriptive statistics. Each line represents a foreign investor characteristic, _FC_ , using different thresholds, while columns 1 to 4 refer to our four measures of FDI spillover potential. Each panel in a column is estimated as a separate regression.

The share of foreign ownership ( _own_ ) matters for the FDI spillover potential. Multinationals with a foreign ownership share of at least 50 and less than 100 percent source more inputs locally compared to other firms, and this effect is even slightly higher for firms with full foreign ownership (column 1). However, we don’t find any effects on alternative measures of FDI spillover potential.

A multinational’s presence in the host country ( _age_fdi_ ) is negatively associated with the share of domestically sourced inputs if the firm has been in the country for at least 20 years (column 1), but positively related with the percentage of domestic workers (column 2). A presence in the host country of at least 10 but less than 20 years is also positive related with the probability to offer supplier assistance (column 4).

If a foreign firm has a moderate technology gap ( _tech_ ) to the leading domestic competitor in the same sector, it is more likely to offer supplier assistance (column 4).

The region of origin ( _origin_ ) also matters for the FDI spillover potential. Interestingly, foreign firms with the largest investor from SSA are more likely to assist domestic suppliers compared to other firms (column 4). In addition, they sell a higher share of their output to the local market (column 3). Firms with their largest foreign investor from Asia (including South Asia) also sell a significantly larger share of output to the local market, but offer significantly less assistance to their domestic suppliers (columns 3 and 4).

In a next step, we evaluate whether the FDI motive influences the extent of FDI linkages. As could be expected, market-seeking FDI ( _motive_market_ ) is positively correlated with the share of sales to the host country (column 3). It is also positive correlated with the probability of supplier assistance (column 4). However, firms where market-seeking FDI is moderate make significantly less use of local workers (column 2).

18
**Table 6: Premia by Foreign Investor Characteristics**

|**Variable**|**Thresholds**||**Measure of FDI S**|**pillover Potential**||
|---|---|---|---|---|---|
||foreign investor = 1 if ...<br>and 0 otherwise|**(1)**<br>**_inp_dom_**|**(2)**<br>**_emp_dom_**|**(3)**<br>**_market_**|**(4)**<br>**_assist_**|
|_own_|50 >=_own_< 100%|19.3783*|0.8246|18.4457|0.7381|
|||(0.053)|(0.751)|(0.533)|(0.433)|
||_own_= 100%|20.1105***|0.5891|15.6657|1.0395|
|||(0.006)|(0.769)|(0.575)|(0.185)|
|_age_fdi_|5 >=_age_fdi_< 10|-4.1679|1.1154|-5.3242|-0.4357|
|||(0.518)|(0.730)|(0.707)|(0.638)|
||10 >=_age_fdi_< 20|6.3996|1.9615|-6.8739|1.5076*|
|||(0.176)|(0.403)|(0.487)|(0.080)|
||_age_fdi_>= 20|-13.8976*|6.9023**|-0.8358|0.9591|
|||(0.055)|(0.040)|(0.965)|(0.210)|
|_tech_|_tech_= 2|0.6802|0.7089|20.1645|6.1271***|
|||(0.945)|(0.784)|(0.133)|(0.000)|
||_tech_= 3|-1.2057|0.8178|9.5329|.|
|||(0.924)|(0.705)|(0.487)|.|
|_origin_|_origin_= SSA|2.6070|-1.2141|31.4395***|4.5044***|
|||(0.739)|(0.800)|(0.000)|(0.000)|
||_origin_= Asia|-1.1053|-7.1175|30.3003***|-1.5248*|
|||(0.890)|(0.171)|(0.001)|(0.072)|
|_motive_market_|_motive_market_= 2|0.0312|-4.1798*|16.9894|.|
|||(0.998)|(0.075)|(0.290)|.|
||_motive_market_>= 3|-0.4772|-2.2504|26.7538***|1.1809**|
|||(0.926)|(0.252)|(0.000)|(0.040)|
|_motive_cost_|_motive_cost_= 2|2.3507|-12.0948**|3.0408|-1.6694*|
|||(0.770)|(0.050)|(0.786)|(0.051)|
||_motive_cost_>= 3|-0.9970|-3.6712|8.7955|-0.0534|
|||(0.877)|(0.109)|(0.440)|(0.940)|
|_motive_res_|_motive_res_= 2|-10.0951|-4.0206|3.0942|-5.3253***|
|||(0.223)|(0.292)|(0.810)|(0.000)|
||_motive_res_>= 3|10.3145|-2.0761|-33.1588**|-10.5863***|
|||(0.274)|(0.509)|(0.023)|(0.000)|
|_motive_asset_|_motive_asset_= 2|3.7012|2.9197|4.6732|.|
|||(0.682)|(0.369)|(0.688)|.|
||_motive_asset_>= 3|-5.4219|2.6393|2.5715|-0.6596|
|||(0.669)|(0.485)|(0.814)|(0.458)|

Source: Own calculations. p*<0.1, p**<0.05, p***<0.01 (p-values in parentheses). Note: All variables except for _assist_ refer to FY 2012. Each panel in a column is estimated as a separate regression. All regressions control for country-sector fixed effects. Standard errors are robust to heteroscedasticity. No observations for _tech_ =4. Missings indicate variables that were dropped from the regressions.

19
Cost-seeking FDI ( _motive_cost_ ) is negatively correlated with the share of local workers (column 2) as well as the probability of offering supplier assistance (column 4) if this motive has a moderate importance for multinationals.

Resource-seeking FDI ( _motive_res_ ) clearly shows a negative correlation with the share of sales going to the host country if this motive is important (column 3). Moreover, it is also negatively associated with supplier assistance, regardless of the importance of this motive (column 4).

# **4 Which Absorptive Capacities Facilitate FDI Linkages?**

This section focuses on the role of domestic supplier characteristics for FDI linkages. In section 4.1, we present the data, while section 4.2 introduces the empirical model where we relate absorptive capacities with FDI linkages. Section 4.3 examines if there are differences in the extent of FDI linkages between different groups of suppliers, depending on their absorptive capacities. Section 4.4 describes the regression results.

## **4.1 Data**

The focus of sections 4 and 5 is on national suppliers (see section 3.1 for a description of our dataset). The national suppliers’ surveys cover 148 firms in Chile (18), Ghana (26), Kenya (29), Mozambique (36) and Vietnam (39). More than half of the suppliers (88) supply to multinationals in agribusiness, followed by mining (48) and apparel (12). These suppliers produce a variety of inputs across the value chain, as shown in Table 7, ranging from chemicals, to equipment, to food and food processing, to business, technical, and other services, among others.

**Table 7: Distribution of Suppliers by Sector**

|**Sector**|**No. of firms**|**%**|
|---|---|---|
|Apparel accessories|4|2.7%|
|Chemicals|22|14.9%|
|Equipment|22|14.9%|
|Food and food processing|24|16.2%|
|Inputs to mining|8|5.4%|
|Packaging|10|6.8%|
|Seeds|11|7.4%|
|Business services|17|11.5%|
|Technical services|20|13.5%|
|Other services|10|6.8%|
|_All sectors_|_148_|100.0%|

20
# **4.2 Empirical Model**

We define the following equation: _linkageisc_ = α 0 + _ACisc_ + _Dcs_ + ε _isc_ (2) _AC_ is a vector denoting supplier-specific absorptive capacities which facilitate FDI linkages, and _linkage_ is our measure of FDI linkages. Building on the theoretical discussion in section 2.2, we include the following absorptive capacities, as defined in Table 8: Due to lacking data on R&D activity, we use _soph_ as a proxy. _emp_ter_ and _emp_sec_ serve as our direct measures of worker skills. _exper_ measures a supplier’s experience and thus serves as an indirect measure of skills. We also include characteristics related to the skills and experience of the general manager, _man_ , namely _man_educ_ and _man_exper_ . _emp_ captures firm size, _export_ export activity, and _dist_ firm location. We also include a measure of technology gap (rather than firm-level productivity per se), _gap_ , as has been outlined in the literature.

**Table 8: Definition of Supplier Characteristics**

|**Variable**|**Definition**|
|---|---|
|_gap_|Technology gap to the leading domestic competitor’s technology in the firm’s sector, ranging from 1 to 4,<br>where 1 means “no difference” and 4 means “large difference|
|_soph_|Degree of sophistication of the firm’s production process, ranging from 1 to 4, where 1 means<br>“standardized” and 4 means “highly sophisticated”|
|_emp_ter_|Percentage of workers with tertiary education in the firm's workforce|
|_emp_sec_<br>_exper_|Percentage of workers with secondary education in the firm's workforce<br>Number of years since firm has started operations in country|
|_man_educ_|Highest level of education of the general manager, ranging from 1 to 3, where 1 means “primary education<br>(without vocational education)”, 2 means “secondary education (vocational education and training)” and 3<br>means “tertiary education (college or university degree)”|
|_man_exper_|Dummy taking the value of 1 if the general manager has previous work experience in a foreign firm in the<br>country or abroad, and 0 otherwise|
|_export_|Dummy taking the value of 1 if a firm exports, and 0 otherwise|
|_dist_|Geographical distance of firm to foreign client in km|

Since the supplier characteristics refer to the survey year (2012), we are constrained to use a _linkage_ measure of the same year. We use the percentage of a supplier’s output to foreign customers ( _outp_ ). While _outp_ does not capture direct productivity gains or other FDI spillovers, a 21
higher share of output to foreign customers makes positive spillovers, for instance via assistance or requirements from the multinational, more likely. The summary statistics are shown in Appendix 5.

# **4.3 Supplier Premia by Absorptive Capacity**

In this section, we split suppliers into several groups to investigate if suppliers with certain characteristics benefit from larger FDI linkages than others. Modifying the specification of equation (2), we assign a dummy taking the value of 1 for suppliers with a certain absorptive capacity, _AC_ , and 0 for all other suppliers in the sample and estimate the impact on the percentage of a supplier’s output to foreign customers ( _outp_ ).

Table 9 shows the descriptive statistics. Each line represents a supplier’s absorptive capacity, _AC_ , applying different thresholds. Each panel is estimated as a separate regression. A highly sophisticated production process ( _soph_ ) has a significantly positive impact on suppliers’ output to foreign firms. Moreover, FDI linkages tend to increase with a more sophisticated production process, as can be seen by the growing coefficient signs on _soph_ and the decreasing p-values.

Firms with a share of workers with secondary education ( _emp_sec_ ) of at least 20 and below 50 percent supply a significantly higher share to foreign investors than other firms. This effect becomes slightly smaller for suppliers employing at least 50 but less than 80 percent of workers with secondary education. However, the effect is no longer significant for suppliers with a share of workers with secondary education of at least 80 percent. The results imply that multinationals in our sample source inputs from domestic suppliers that are somewhat but not too skill-intensive.

Firm size also has an influence on FDI linkages. Suppliers with at least 50 but less than 250 employees have a significantly lower output share than other suppliers. The effect is also negative for alternative threshold levels, but misses the levels of statistical significance narrowly.

Finally, geographical location also matters. FDI linkages are significantly lower for suppliers that are located more than 500 km from their foreign clients ( _dist_ ), but the negative effect levels off for suppliers that are located closer to their foreign client. Given the existence of premia for several supplier groups, we assess the impact of supplier characteristics on the extent of FDI linkages in the next section.

22
**Table 9: Supplier Premia by Absorptive Capacity**

|**Variable**|**Thresholds**|**Measure of FDI**|**Linkage:****_outp_**|
|---|---|---|---|
||supplier = 1 if ... and 0 otherwise|**Difference**|**p-value**|
|_gap_|_gap_= 2|-7.2833|(0.448)|
||_gap_>= 3|-2.8160|(0.713)|
|_soph_|_soph_= 2|0.7105|(0.941)|
||_soph_= 3|5.7639|(0.516)|
||_soph_= 4|23.1604*|(0.072)|
|_emp_ter_|20% >=_emp_ter_< 50%|12.6626|(0.112)|
||50% >=_emp_ter_< 80%|-5.5474|(0.541)|
||_emp_ter_>= 80%|-8.9682|(0.526)|
|_emp_sec_|20% >=_emp_sec_< 50%|18.2152**|(0.042)|
||50% >=_emp_sec_< 80%|15.5753*|(0.095)|
||_emp_sec_>= 80%|8.4187|(0.484)|
|_exper_|3 >=_exper_< 10|20.9871|(0.139)|
||10 >=_exper_< 20|14.4016|(0.296)|
||20 >=_exper_< 30|6.4514|(0.647)|
||_exper_>= 30|27.5507*|(0.080)|
|_man_educ_|_man_educ_= 2|3.3842|(0.841)|
||_man_educ_= 3|-10.1846|(0.493)|
|_man_exper_|_man_exper_= 1|7.3526|(0.314)|
|_emp_|10 >=_emp_< 50|-18.1670|(0.157)|
||50 >=_emp_< 250|-24.1310*|(0.072)|
||_emp_>= 250|-23.7696|(0.118)|
|_export_|_export_= 1|9.8261|(0.121)|
|_dist_|20 >=_dist_< 100|-19.9154*|(0.056)|
||100 >=_dist_< 500|-18.0726*|(0.057)|
||_dist_>= 500|-26.1891***|(0.005)|

Source: Own calculations. p*<0.1, p**<0.05, p***<0.01 (p-values in parentheses). Note: All variables refer to FY 2012. Each panel is estimated as a separate regression. All regressions control for country-sector fixed effects. Standard errors are robust to heteroscedasticity.

# **4.4 Regression Results**

## **_Overall Results_**

Table 10 reports the regression results based on the specification of equation (3). Given the differences between supplier sectors and countries, all regressions control for country-sector fixed effects. Standard errors are robust to heteroscedasticity. A more sophisticated production process ( _soph_ ) has a significantly positive impact on suppliers’ output to foreign firms, supporting the positive role of R&D for local firms in the literature. Firm location also matters for FDI linkages. A larger distance to the foreign firm (ln _dist_ ) reduces the supplier’s output share going to foreign 23
clients, supporting the findings of Barrios et al. (2006) who find evidence that foreign firms collocating in the same sector and region significantly increase productivity and employment. A larger size (ln _emp_ ) seems to be negatively associated with FDI linkages, while exporting ( _exp_ ) seems to have a positive impact, although both narrowly miss the 10 percent threshold of statistical significance. Including all absorptive capacities simultaneously (column 9) confirms the findings only for firm size (ln _emp_ ) and distance to the foreign firm (ln _dist_ ).

**Table 10: The Effect of Suppliers’ Absorptive Capacity on Output Share to Foreign Firms, OLS**

|Dependent variable:|_outpisc_|||||||||
|---|---|---|---|---|---|---|---|---|---|
||(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|(9)|
|_gapisc_|-1.6276<br>(0.609)||||||||-1.0695<br>(0.800)|
|_sophisc_|5.9014*<br>(0.094)||||||||6.4544<br>(0.120)|
|_emp_terisc_||-0.1314|||||||-0.2208|
|||(0.317)|||||||(0.234)|
|_emp_secisc_|||0.1005||||||0.0037|
||||(0.396)||||||(0.980)|
|ln_experisc_||||1.4755|||||4.7960|
|||||(0.744)|||||(0.450)|
|_man_educisc_|||||-10.0299||||-6.3287|
||||||(0.142)||||(0.412)|
|_man_experisc_|||||6.0535||||9.7105|
||||||(0.419)||||(0.283)|
|ln_empisc_||||||-3.4974|||-6.7818*|
|||||||(0.106)|||(0.051)|
|_exportisc_|||||||9.8261||10.2026|
||||||||(0.121)||(0.296)|
|ln_distisc_||||||||-4.0871**<br>(0.014)|-2.9573*<br>(0.069)|
|_constantisc_|48.7270**|63.7402***|54.2755***|54.3062**|83.3056***|70.1656***|56.2935***|69.4351***|80.0081***|
||(0.013)|(0.001)|(0.002)|(0.013)|(0.000)|(0.000)|(0.001)|(0.000)|(0.003)|
|Country- sector FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|R2|0.31|0.32|0.31|0.29|0.33|0.33|0.30|0.34|0.48|
|Observations|109|107|107|109|112|107|110|105|93|

Source: Own calculations. p*<0.1, p**<0.05, p***<0.01 (p-values in parentheses). Note: All variables refer to FY 2012. All regressions control for country-sector fixed effects. Standard errors are robust to heteroscedasticity.

# **_Results for Established Suppliers_**

It is likely that firms having a longer supplier experience have different absorptive capacities compared to firms that just started supplying to a foreign client, especially as structural changes (such as changes in the supplier’s capacity, sophistication of production processes or skill levels) may happen early on during their relationship. We therefore rerun the regressions for supplier firms that have a supplier relationship of at least three years (see Table 11).

While the positive impact of a more sophisticated production process ( _soph_ ) and the negative impact of a larger distance to the foreign firm (ln _dist_ ) can be confirmed, we also find a significantly 24
negative impact of the share of workers with tertiary education ( _emp_ter_ ) on the supplier’s share of output going to foreign firms. A higher educational level of the general manager ( _man_educ_ ) also reduces FDI linkages. While our focus here is on the suppliers’ output share to foreign firms and not on FDI spillovers, our findings can be related to those by Sinani and Meyer (2004) who find that a larger share of human capital leads to negative FDI spillovers (see section 2.2), although the underlying mechanisms may be different. It may be possible that suppliers with highly educated managers supply a larger share of inputs to firms abroad, for instance, because they may have fewer language barriers. In the overall sample (column 9), however, only distance to the foreign firm (ln _dist_ ) shows a significant effect.<sup>4</sup>

**Table 11: The Effect of Suppliers’ Absorptive Capacity with Supplier Relationship of at Least Three Years on Output Share to Foreign Firms, OLS**

|Dependent variable:|_outpisc_|||||||||
|---|---|---|---|---|---|---|---|---|---|
||(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|(9)|
|_gapisc_|-3.1899<br>(0.341)||||||||-3.4042<br>(0.412)|
|_sophisc_|6.9340*<br>(0.055)||||||||6.8075<br>(0.102)|
|_emp_terisc_||-0.2337*|||||||-0.2822|
|||(0.067)|||||||(0.105)|
|_emp_secisc_|||0.1797||||||-0.0169|
||||(0.179)||||||(0.911)|
|ln_experisc_||||-2.2745|||||-0.0370|
|||||(0.709)|||||(0.996)|
|_man_educisc_|||||-14.2539**||||-13.6016|
||||||(0.048)||||(0.176)|
|_man_experisc_|||||5.5674||||10.0019|
||||||(0.469)||||(0.265)|
|ln_empisc_||||||-2.3064|||-4.5781|
|||||||(0.302)|||(0.200)|
|_exportisc_|||||||10.8120||7.7413|
||||||||(0.114)||(0.414)|
|ln_distisc_||||||||-3.7772**<br>(0.025)|-2.5183*<br>(0.097)|
|_constantisc_|49.5283**|67.6262***|50.7481***|65.6000**|95.1645***|66.2781***|56.0470***|68.6250***|113.8197***|
||(0.015)|(0.001)|(0.008)|(0.014)|(0.000)|(0.000)|(0.001)|(0.000)|(0.001)|
|Country-sector FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|<br>R2|0.33|0.36|0.34|0.30|0.35|0.33|0.32|0.36|0.54|
|Observations|102|100|100|102|105|100|103|99|87|

Source: Own calculations. p*<0.1, p**<0.05, p***<0.01 (p-values in parentheses). Note: All variables refer to FY 2012. All regressions control for country-sector fixed effects. Standard errors are robust to heteroscedasticity.

4 We also interact each absorptive capacity with a SSA dummy to test for location-specific effects. The SSA dummy takes the value of 1 if the supplier is located in Ghana, Kenya, and Mozambique, and 0 if the supplier is located in Chile and Vietnam. We find that the effects are more favorable if firms are located in SSA. A larger share of workers with secondary education has a more positive impact on FDI linkages in SSA compared to non-SSA countries, while a higher educational level of the general manager and larger distances between suppliers and multinationals both have a less negative effect (results available upon request).

25
# **5 Which Factors within Transmission Channels Support FDI Spillovers?**

## **5.1 Supplier Premia by Factors within Transmission Channel**

In this section, we evaluate whether suppliers that benefited from any demand or assistance effects are characterized by higher FDI linkages and spillovers than suppliers that don’t. Table 12 shows the supplier premia by transmission channel (see Appendix 5 for summary statistics). Focusing on FDI linkages first, firms that received assistance from the foreign customer to make improvements ( _assist_ ) supply a significantly higher share of their output to foreign clients than firms that don’t ( _outp_ column).

**Table 12: Supplier Premia by Factors within Transmission Channel**

|||**Meas**|**ure:**|
|---|---|---|---|
|**Variable**|**Definitions**|**_outp_**|**_exp_start_**|
|_audit_|Dummy taking the value of 1 if supplier received technical audits|-0.6666|0.8551**|
||before or after signing a contract with the foreign customer, and 0<br>otherwise|(0.909)|(0.049)|
|_impr_|Dummy taking the value of 1 if the foreign customer required|1.9031|0.3366|
||the supplier to make improvements before or after signing the<br>contract, and 0 otherwise|(0.796)|(0.468)|
|_assist_|Dummy taking the value of 1 if supplier received assistance from|16.5684**|1.3256***|
||the foreign customer to meet any requirements before or after<br>signing the contract, and 0 otherwise.|(0.013)|(0.008)|
|_dev_|Dummy taking the value of 1 if supplier developed product jointly|10.7522|1.2506***|
||with the foreign customer, and 0 otherwise.|(0.129)|(0.006)|
|_license_|Dummy taking the value of 1 if supplier licensed technology|5.1151|1.2387**|
||from the foreign customer, and 0 otherwise.|(0.498)|(0.014)|

Source: Own calculations. p*<0.1, p**<0.05, p***<0.01 (p-values in parentheses). Note: All regressions control for country-sector fixed effects. Standard errors are robust to heteroscedasticity.

Besides FDI linkages, we also include _exp_start_ as our FDI spillover measure, which is a dummy taking the value of 1 if the firm started exporting as a consequence of supplying to a foreign customer, and 0 otherwise. The results confirm that several transmission channels matter for backward FDI spillovers. Suppliers receiving technical audits before or after signing the contract ( _audit_ ), suppliers receiving assistance from their foreign clients ( _assist_ ), suppliers with joint product development with their customers ( _dev_ ), and suppliers licensing technology from their foreign client ( _license_ ) are more likely to export as a result of their supplier-relationship ( _exp_start_ column). In sum, we find evidence of the existence of positive assistance effects (including technical 26
audits, joint product development, and technology licensing) in global value chains, while demand effects (measured as requirements to improve) do not have any impact.

# **5.2 Empirical Model**

In this second exercise, we focus on the role of transmission channels for FDI spillovers: _spilloverisc_ = α 0 + _TCisc_ + _Dcs_ + ε _isc_ (4) _TC_ is a vector relating to various factors within transmission channels through which multinationals influence national suppliers and thus make FDI spillovers more likely, and _spillover_ is our measure of FDI spillover.

We specify the following transmission channels, as defined in section 5.1: _spilloverisc_ = α 0 + _auditisc_ + _imprisc_ + _assistisc_ + _devisc_ + _licenseisc_ + _Dcs_ + ε _isc_ (5) _audit_ and _impr_ capture demand effects in global value chains, while _assist, dev,_ and _license_ represent assistance effects. We use _exp_start_ as our spillover measure (see section 5.1. for a definition).

# **5.3 Regression Results**

## **_Overall Results_**

Table 13 follows the specification of equation (5) and uses exporting as a consequence of supplying to a foreign customer ( _exp_start_ ) as the spillover measure. Technical audits ( _audit_ ), assistance by foreign customers ( _assist_ ), joint product development ( _dev_ ), and licensed technology from the foreign customer ( _license_ ) all significantly influence a supplier’s likelihood of starting to export as a result of supplying to a foreign customer. In the combined sample (column 6), we can confirm the significantly positive effects of technical audits ( _audit_ ) and assistance by foreign customers ( _assist_ ). Again, requirements to improve ( _impr_ ) do not have any impact, supporting our previous finding of no demand effects.<sup>5</sup>

> 5 We also interact each transmission channel with a SSA dummy to test for location-specific effects. The SSA dummy takes the value of 1 if the supplier is located in Ghana, Kenya, and Mozambique, and 0 if the supplier is located in Chile and Vietnam. We find that technical audits from and joint product development with the foreign investor have a more positive effect on suppliers in SSA compared to non-SSA countries, while assistance and licensed technology from the foreign customer lower the positive impact in SSA (results available upon request).

27
**Table 13: The Effect of Factors within Transmission Channels on the Probability of Starting to Export, Probit**

|Dependent variable:_e_|_xp_startisc_<br>||||||
|---|---|---|---|---|---|---|
||(1)|(2)|(3)|(4)|(5)|(6)|
|_auditisc_|0.8551**|||||0.9166*|
||(0.049)|||||(0.071)|
|_imprisc_||0.3366||||-0.1203|
|||(0.468)||||(0.827)|
|_assistisc_|||1.3256***|||1.4075***|
||||(0.008)|||(0.008)|
|_devisc_||||1.2506***||0.8537|
|||||(0.006)||(0.138)|
|_licenseisc_|||||1.2387**|0.8975|
||||||(0.014)|(0.105)|
|_constantisc_|-6.9418***|-6.4233***|-6.0867***|-7.3373***|-6.0867***|-7.7367***|
||(0.000)|(0.000)|(0.000)|(0.000)|(0.000)|(0.000)|
|Country-sector FE|Yes|Yes|Yes|Yes|Yes|Yes|
|Adj. R2<sup>1)</sup>|-0.219|-0.267|-0.161|-0.172|-0.197|-0.121|
|Observations|55|55|55|55|55|55|

Source: Own calculations. p*<0.1, p**<0.05, p***<0.01 (p-values in parentheses).<sup>1)</sup> McFadden’s adjusted pseudo R2. Note: All regressions control for country-sector fixed effects. Standard errors are robust to heteroscedasticity.

# **_Results by Types of Requirements_**

The non-existence of demand effect, i.e. spillovers from a customer’s requirements to improve ( _impr_ ), raises the question whether only specific types of requirements to improve may be relevant to FDI spillovers. Appendix 6 shows the summary statistics and definitions of the different subindicators of _impr_ available in our dataset. A sub-indicator takes the value of 1 if the foreign customer required the supplier to make improvements before or after signing the contract, and 0 otherwise. Using the specification of equation (4), we substitute each of these sub-indicators for _impr_ . Appendix 7 shows the regression results. Of the 13 sub-indicators of _impr_ , none shows a significant impact. In sum, the regression results give evidence of strong assistance effects in global value chains, but no evidence of demand effects.

# **_Results by Types of Assistance_**

In this section, we study in more detail which types of assistance are most effective in generating positive FDI spillovers in our data sample. Table 4 shows the definitions of the different sub-indicators of _assist_ available in the dataset, while Appendix 8 shows the summary statistics. Again, assistance is measured as a dummy taking the value of 1 if a supplier obtains assistance from the multinational, and 0 otherwise. Table 14 and Table 15 report the results using the specification of equation (5) substituting various types of assistance for _assist_ and using the likelihood to start 28
exporting due to a supplier-relationship with a foreign customer ( _exp_start_ ) as the dependent variable.

**Table 14: The Effect of Assistance on the Probability of Starting to Export due to Relationship with Foreign Firm, Part 1, Probit**

|Dependent variabl|e:_exp_starti_|_sc_||||||||
|---|---|---|---|---|---|---|---|---|---|
||(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|(9)|
|_auditisc_|0.9181*<br>(0.070)|0.9638*<br>(0.055)|0.9207*<br>(0.071)|0.9022*<br>(0.071)|0.8890*<br>(0.077)|1.0122*<br>(0.062)|0.9072*<br>(0.073)|0.9092*<br>(0.068)|0.9766*<br>(0.051)|
|_imprisc_|-0.2019<br>(0.712)|0.2380<br>(0.659)|-0.0289<br>(0.955)|0.0364<br>(0.945)|-0.1210<br>(0.817)|-0.1012<br>(0.845)|-0.1148<br>(0.824)|0.0158<br>(0.976)|-0.0980<br>(0.853)|
|_devisc_|<br>0.6726|<br>0.4277|<br>0.7549|<br>0.8038|<br>0.9490*|<br>0.8419|<br>0.8734*|<br>0.7910|<br>0.3870|
||(0.221)|(0.458)|(0.185)|(0.127)|(0.061)|(0.102)|(0.084)|(0.130)|(0.509)|
|_licenseisc_|0.8968*|0.5970|0.8004|0.7349|0.6149|0.8788*|0.5805|0.6898|0.7940|
|_assist_payisc_<br>_assist_imprisc_<br>_assist_fundsisc_|(0.097)<br>1.1684**<br>(0.024)|(0.324)<br>1.7908**<br>(0.026)|(0.159)<br>0.8546<br>(0.286)|(0.191)|(0.277)|(0.092)|(0.305)|(0.223)|(0.187)|
|_assist_planisc_<br>_assist_inpisc_||||0.9034<br>(0.210)|0.9644<br>(0.143)|||||
|_assist_sourcisc_||||||1.1450*<br>(0.083)||||
|_assist_trainisc_<br>_assist_equipisc_<br>_assist_techisc_|||||||1.2032*<br>(0.067)|0.9497<br>(0.160)|1.6031**<br>(0.020)|
|_constantisc_|-7.4756***<br>(0.000)|-7.7162***<br>(0.000)|-7.7334***<br>(0.000)|-7.8291**<br>(0.000)|* -7.8037***<br>(0.000)|-7.8395***<br>(0.000)|-7.7525***<br>(0.000)|-7.8026***<br>(0.000)|<br>-7.3524***<br>(0.000)|
|Country-sector FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Adj. R2<sup>1)</sup>|-0.159|-0.163|-0.205|-0.202|-0.197|-0.179|-0.184|-0.199|-0.163|
|Observations|55|55|55|55|55|55|55|55|55|

Source: Own calculations. p*<0.1, p**<0.05, p***<0.01 (p-values in parentheses).<sup>1)</sup> McFadden’s adjusted pseudo R2. Note: All regressions control for country-sector fixed effects. Standard errors are robust to heteroscedasticity.

Ten types of assistance significantly increase the likelihood to start exporting as a consequence of supplying to foreign firms, namely (i) advance payment ( _assist_pay_ ), (ii) provision of financing for improvements ( _assist_impr_ ), (iii) support for sourcing raw materials ( _assist_sourc_ ), (iv) training of workers ( _assist_train_ ), (v) product or process technologies ( _assist_tech_ ), (vi) licensing of patented technology ( _assist_license_ ), (vii) help with the organization of production lines ( _assist_orga_ ), (viii) help with quality assurance ( _assist_qual_ ), (ix) help with finding export opportunities ( _assist_exp_ ), and (x) help with implementing health, safety, environmental, and/or social conditions ( _assist_hse_ ). Overall, all types of assistance show a positive coefficient sign, and many miss the threshold level of 29
statistical significance only narrowly. In sum, we find strong evidence of assistance effects in global value chains for FDI spillovers.

**Table 15: The Effect of Assistance on the Probability of Starting to Export due to Relationship with Foreign Firm, Part 2, Probit**

|Dependent variabl|e:_exp_starti_|_sc_||||||||
|---|---|---|---|---|---|---|---|---|---|
||(1)|(2)|(3)|(4)|(5)|(6)|(7)|(8)|(9)|
|_auditisc_|0.8834*<br>(0.079)|0.9558*<br>(0.061)|0.8693*<br>(0.075)|0.7906*<br>(0.099)|0.8267*<br>(0.087)|0.8267*<br>(0.087)|0.8751*<br>(0.079)|0.7924*<br>(0.099)|1.0472*<br>(0.053)|
|_imprisc_|0.0178<br>(0.973)|0.0100<br>(0.985)|-0.1796<br>(0.740)|0.0824<br>(0.875)|-0.1168<br>(0.826)|-0.1168<br>(0.826)|-0.1327<br>(0.802)|-0.1387<br>(0.794)|-0.1363<br>(0.798)|
|_devisc_|<br>0.8849*|<br>0.8012|<br>0.6690|<br>0.8825*|<br>0.9440*|<br>0.9440*|<br>0.8656*|<br>0.8684*|<br>0.6131|
||(0.081)|(0.134)|(0.236)|(0.091)|(0.065)|(0.065)|(0.089)|(0.099)|(0.258)|
|_licenseisc_|0.6547|0.7734|0.7828|0.6869|0.6901|0.6901|0.7473|0.5457|0.7957|
||(0.254)|(0.141)|(0.179)|(0.236)|(0.228)|(0.228)|(0.185)|(0.330)|(0.136)|
|_assist_maintisc_<br>_assist_licenseisc_<br>_assist_orgaisc_|0.6738<br>(0.260)|1.4250**<br>(0.016)|1.0601*<br>(0.060)|||||||
|_assist_qualisc_||||1.0160**<br>(0.041)||||||
|_assist_inventisc_|||||0.6007<br>(0.387)|||||
|_assist_auditisc_||||||0.6007<br>(0.387)||||
|_assist_stratisc_<br>_assist_expisc_<br>_assist_hseisc_|||||||0.6723<br>(0.145)|1.2943**<br>(0.027)|1.4993**<br>(0.014)|
|_constantisc_|-7.8728***<br>(0.000)|-7.8537***<br>(0.000)|-7.4454***<br>(0.000)|-7.8423***<br>(0.000)|-7.7406***<br>(0.000)|-7.7406***<br>(0.000)|-7.6948***<br>(0.000)|-7.6089***<br>(0.000)|<br>-7.6106***<br>(0.000)|
|Country-sector FE|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|Yes|
|Adj. R2<sup>1)</sup>|-0.204|-0.150|0.183|-0.183|-0.209|-0.209|-0.199|-0.179|-0.139|
|Observations|55|55|55|55|55|55|55|55|55|

Source: Own calculations. p*<0.1, p**<0.05, p***<0.01 (p-values in parentheses).<sup>1)</sup> McFadden’s adjusted pseudo R2. Note: All regressions control for country-sector fixed effects. Standard errors are robust to heteroscedasticity.

30
# **6 Summary and Conclusions**

## **6.1 Summary of Results**

Using newly collected survey data on direct supplier-multinational linkages in Chile, Ghana, Kenya, Lesotho, Mozambique, Swaziland, and Vietnam, this paper evaluated whether foreign investors differ from domestic producers in terms of their overall performance, linkages with the local economy, and supplier assistance which all influence the firms’ potential to generate productivity spillovers. Besides apparel, the firms in our sample cover two natural resourcesintensive industries, namely agribusiness and mining. We found that foreign investors outperform domestic producers in terms of sales, firm size, productivity, exporting behavior, and direct export share. While this would imply a higher knowledge and productivity spillover potential compared to domestic firms, foreign investors have fewer linkages with the local economy in terms of using domestic inputs and workers. However, the findings also show that certain service inputs, namely technical services and transport, security, cleaning, catering, and other services, show a higher potential for linkages. There is also some evidence that foreign firms offer less assistance to local suppliers. Fewer linkages and supplier assistance both can limit the positive impact from FDI.

In a next step, we studied the relationship between foreign investor characteristics and the FDI spillover potential. In sum, we found that foreign investor characteristics matter for FDI linkages and supplier assistance, but the size and direction of the relationship depends on the measure of FDI spillover potential we used. For example, a multinational’s presence in the host country is negatively associated with the share of domestically sourced inputs if the firm has been in the country for at least 20 years, but positively related with the percentage of domestic workers. Other foreign firm characteristics, on the other hand, show a less ambiguous picture. Market-seeking FDI, for example, shows a positive relationship with the share of sales to the host country as well as the probability of supplier assistance. And suppliers with the largest investor from SSA are associated with a larger share of sales to the local market and a higher likelihood of supplier assistance. Suppliers with the largest investor from Asia also sell a significantly larger share of output to the local market, but offer significantly less assistance to their domestic suppliers.

The second part of this paper first examined the role of supplier firms’ absorptive capacities for FDI linkages. These firms supply to multinationals in agribusiness, mining, and apparel, but produce a variety of inputs across the value chain. The results indicated that several supplier characteristics 31
matter for FDI linkages, measured as the share of output going to multinationals, which in turn increases the FDI spillover potential. A more sophisticated production process has a significantly positive impact on FDI linkages, whereas a larger geographical distance to the foreign client shows a negative effect. The descriptive statistics also showed that firms with a share of workers with secondary education of at least 20 percent supply a significantly higher share to foreign investors than other firms. While this effect could not be confirmed by the regression results covering the full sample, we found a significantly negative impact of the share of workers with tertiary education on FDI linkages when we focus on suppliers with a supplier relationship of at least three years. The general manager’s educational level also has a negative effect. Overall, these findings suggest that a larger share of human capital leads to reduced FDI linkages in supplier firms. One possible explanation for this unexpected result could be that suppliers with highly educated managers supply a larger share of inputs to firms abroad, for instance, because they may have fewer language barriers. Finally, we also found evidence that a higher number of employees reduce the supplier’s share of output to foreign firms.

In a next step, we assessed whether factors within the transmission channels between multinationals and suppliers influence FDI spillovers, focusing on assistance and demand effects. We used exporting as a consequence of supplying to a foreign customer as our spillover measure. The results confirmed that several transmission channels matter for backward FDI spillovers. Suppliers receiving technical audits before or after signing the contract, suppliers receiving assistance from their foreign clients, suppliers with joint product development with their customers, and suppliers licensing technology from their foreign client are more likely to export as a result of their supplier-relationship. In sum, we find evidence of the existence of positive assistance effects (including technical audits, joint product development, and technology licensing) in global value chains, while demand effects (measured as requirements to improve) do not have any impact.

Finally, we also studied which types of assistance are most effective in generating positive FDI spillovers in our data sample. Ten types of assistance significantly increase the likelihood to start exporting as a consequence of supplying to foreign firms, namely advance payment, provision of financing for improvements, support for sourcing raw materials, training of workers, product or process technologies, licensing of patented technology, help with the organization of production lines, help with quality assurance, help with finding export opportunities, and help with implementing health, safety, environmental, and/or social conditions.

32
# **6.2 Policy Conclusions**

Our findings suggest that the FDI spillover potential via global value chains depends on the extent, durability, and quality of linkages between foreign investors and the local economy. Investment promotion alone is not sufficient to benefit from FDI spillovers. It is important to embed foreign investors into the local economy to increase the amount and quality of linkages, and therefore the possibility for supplier assistance and the potential for FDI spillovers in the long-term. In order to integrate foreign investors into local value chains, government agencies could identify potential domestic suppliers, and encourage foreign investors to participate in supplier development and assistance, and give incentives to multinationals to collaborate with local universities, research institutes or other firms which would improve the local skill and innovation capacity (Potter 2002).

Policies that aim at increasing FDI linkages will be more targeted if foreign firm characteristics and the absorptive capacities of domestic suppliers are taken into account. Our results have shown, for example, that the foreign investor’s origin and investment motive as well as the share of foreign ownership matter for FDI linkages and supplier assistance. In addition, policies should aim at strengthening absorptive capacities that have shown to increase FDI linkages, including the degree of sophistication of suppliers’ production processes. Policies should also target some of the obstacles to FDI linkages, such as large geographical distances between suppliers and their foreign clients. Removing barriers to natural agglomeration, for example, through investments in infrastructure, the provision of social services, or regional integration arrangements, could reduce geographical distances between suppliers and multinationals and thus increase the FDI spillover potential.

Finally, researchers should focus more strongly on understanding better the transmission channels leading to FDI spillovers. While our paper focused on assistance and demand effects, other transmission channels in value chains include diffusion, availability, and quality effects. Besides transmission channels in value chains, research also needs to explore better the effect of changing market forces (demonstration and competition effects) and labor turnover. This will help guide policies designed to remove barriers within transmission channels, enabling the FDI spillover potential to translate into actual FDI spillovers.

33