metadata: authors: 0: author: Davies,Ronald B.
1: author: Lamla,Michael Josef
2: author: Schiffbauer,Marc Tobias
count: Jordan
docna: 0: docna: Learning or leaning : persistent and
            transitory growth spillovers from FDI
docty: Policy Research Working Paper
subtopic: Construction Industry,Common Carriers Industry,Food & Beverage Industry,General Manufacturing,Pulp & Paper Industry,Plastics & Rubber Industry,Labor Markets,Macroeconomic Management,Business Cycles and Stabilization Policies
teratopic: International Economics and Trade,Industry,Science and Technology Development,Macroeconomics and Economic Growth
abstracts: cdata!: Using firm-level data for Jordan, the
            paper estimates the extent to which growth spillovers from
            foreign direct investment (FDI) to local firms stem from
            persistent learning externalities (i.e., they endure even
            after foreign investment leaves as knowledge has been
            transferred to local firms) or from transitory effects
            (e.g., demand increases that evaporate following
            disinvestment). The paper find that spillovers have a
            significant transitory nature, with employment and capital
            growth declining when FDI falls, particularly in downstream
            industries supplied by locals. This suggests that if
            FDI-attracting policies are intended to promote sustainable
            growth, it may be more effective to attract and retain FDI
            via long-term structural policies, for instance, through low
            corporate tax rates rather than temporary tax holidays or
            through policies that strengthen the domestic absorptive
            capacity and linkages between foreign and local firms.
geo_reg_key: 119229,517202,517191
repnme: repnme: Learning or leaning : persistent and
            transitory growth spillovers from FDI
display_title: Learning or leaning : persistent and
            transitory growth spillovers from FDI
listing_relative_url: /research/2016/03/26009198/learning-or-leaning-persistent-transitory-growth-spillovers-fdi
topicv3: Structural Policy and Reform m1326450 1130,Job Creation and Job Opportunities
            m1326483 1170,Manufacturing Sectors m1326521 1281,Industry Policy m1327403 1075,Jobs m1503931 2670
publishtoextweb_dt: 2016-03-02T00:00:00Z
historic_topic: International Economics and Trade,Industry,Science and Technology Development,Macroeconomics and Economic Growth
no_of_pages: 28
author_keys: 0: author_key: 1295376
1: author_key: 1067388
model_extractions: WPS7591 Policy Research Working Paper 7591 Learning or Leaning Persistent and Transitory Growth Spillovers from FDI _Ronald B. Davies Michael J. Lamla Marc Schiffbauer_ Macroeconomics and Fiscal Management Global Practice Group March 2016
Policy Research Working Paper 7591

# **Abstract**

Using firm-level data for Jordan, the paper estimates the extent to which growth spillovers from foreign direct investment (FDI) to local firms stem from persistent learning externalities (i.e., they endure even after foreign investment leaves as knowledge has been transferred to local firms) or from transitory effects (e.g., demand increases that evaporate following disinvestment). The paper find that spillovers have a significant transitory nature, with employment and capital growth declining when FDI falls, particularly in downstream industries supplied by locals. This suggests that if FDI-attracting policies are intended to promote sustainable growth, it may be more effective to attract and retain FDI via long-term structural policies, for instance, through low corporate tax rates rather than temporary tax holidays or through policies that strengthen the domestic absorptive capacity and linkages between foreign and local firms.

This paper is a product of the Macroeconomics and Fiscal Management Global Practice Group. 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 authors may be contacted at mschiffbauer@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
or Learning Leaning: Persistent and Transitory Spillovers from FDI Ronald B. Davies,<sup>_§_</sup> Michael J. Lamla,<sup>_†_</sup> and Marc Schiffbauer<sup>_‡_</sup>

**Keywords** : FDI; Spillovers.

**JEL classification** : F23; F16.

> _§_ University College Dublin. Email: ronbdavies@gmail.com

> _†_ University of Essex and ETH Zurich, KOF Swiss Economic Institute. Email: mlamla@essex.ac.uk

> _‡_ The World Bank. Email: mschiffbauer@worldbank.org We thank Beata Javorcik for very helpful comments and the Jordan Department of Statistics as well as the Jordan Ministry of Planning and International Organization for their generous support, providing access to the data and valuable feedback.
# **1 Introduction**

Among the many reasons given for attracting foreign direct investment (FDI) is the notion that multinational enterprises (MNEs) provide spillovers to local firms, thereby increasing productivity, employment, and investment. Since Javorcik’s (2004) seminal seminal contribution, a large literature has grown that documents when and in what ways foreign entry into an economy affects local firms. In particular, the literature has revealed the importance of both, foreign ownership within a given firm as well as FDI in the sectors local firms supply to while evidence for spillovers from MNEs in the same industry and in those supplying to locals is less robust. Although these findings have often been interpreted as showing the existence of persistent learning externalities from FDI, the exact nature of such productivity growth effects has not been analyzed yet.

In the theoretical literature, two overarching themes describe how spillovers occur.<sup>1</sup> First, there is the idea of persistent technological or learning spillovers (broadly defined including management practices) in which MNEs improve local technology either through direct sharing, imitation by locals, and/or labour market churning. Persistent spillovers may also arise from linkages to the global economy in which local firms learn from MNEs about clients or suppliers of intermediate inputs from technologically more advanced countries. We label these persistent growth spillovers as learning effects since they embody knowledge transfers to local firms generating productivity externalities independent of the continuous local presence of MNEs. Second, the entry of MNEs increases the demand for locally sourced goods and services in the domestic economy as long as the MNEs operate in the country. This domestic demand effect can generate temporary productivity spillovers for local firms, for instance, as they temporarily benefit from economies of scale or higher quality of the inputs they receive from the MNEs. But these effects are transitory in the sense that they evaporate with the disinvestment of the foreign firm (linkage) if the knowledge about the adaption of new technologies, management practices, or linkages with firms in more advanced countries has not been transferred to the local firm.<sup>2</sup> We label these transitory growth spillovers as leaning effects as local firms rely on the presence of the MNE as the main client or intermediary.

The persistence of FDI spillovers has not been discussed despite the fundamentally different economic consequences and implied mechanisms: if the gains come from _learning_ effects the benefits to local firms remain after the MNE leaves; if they come from _leaning_ effects they quickly evaporate when the MNE exits. Understanding this distinction is critical for several reasons. First, it helps clarify whether attracting FDI is a shortcut to promote foreign tech-

> 1See, for example, Rodriguez-Clare (1996).

> 2See Javorcik and Spatareanu (2003) for a discussion of these various spillover mechanisms.

1
nology diffusion and thus persistent productivity externalities among local firms in the host country or if more difficult behind-the-border structural policy reforms are indispensable. Second, it matters for the design of developing FDI policy because it indicates whether it is enough to simply attract the MNE for a limited time (via, for example, a tax holiday) or whether the government must aim to attract and retain foreign firms such as by maintaining low corporate tax rates, strengthening the domestic absorptive capacity, or promoting technology sharing between foreign and local firms (for instance, through joint ventures). Third, if growth spillovers stem primarily from leaning rather than learning effects, FDI-led growth increases a country’s vulnerability to adverse global shocks in that the productivity gains of domestic firms will be partly reversed with the disinvestment of multinational firms.<sup>3</sup> This paper contributes to the existing literature by exploring whether there are asymmetric spillover effects from FDI increases and decreases using Jordanian firm-level data. Jordan is a particularly good example to study (spillover) effects of FDI. First of all Jordan has seen a massive increase in FDI over the last decade cumulating to a share of FDI relative to GDP of 10.1 percent in 2008, becoming one of the most attractive countries for FDI.<sup>4</sup> Furthermore, given the market oriented reforms undertaken, it has also generated sufficient absorptive capacity to take advantage of FDI effects. Our estimates do indeed reveal significant asymmetries between MNE entries and exits which point to significant temporary components to spillovers. We find that FDI in downstream industries (i.e., those that purchase inputs from local firms) are particularly important in generating these transitory leaning effects among local suppliers, with smaller local firms being especially impacted by exiting MNEs. Our results suggest that the significant FDI spillovers to local suppliers in upstream industries which have been found in several developing countries do not necessarily capture persistent learning effects (such as technology transfers) but rather transitory leaning effects reflecting the higher demand for locally sourced goods and services as long as the MNE operates in the country.

Given the large literature on the spillovers from FDI, at this stage it is more useful to point the reader to overviews of the findings rather than specific studies. In particular, Blomstr ̈om and Kokko (1998) provide an discussion of the earlier literature; for more recent coverage, see Irsov ́a and Havr ́anek (2013), Havr ́anek and Irsov ́a (2010), or Wooster and Diebel (2010). From this literature, two broad themes emerge. First, the impact of FDI on local firms hinges on the supply chain relationship between the MNEs and the local firm. As delineated by Rodriguez-Clare (1996), this relationship can be horizontal (with the MNE

> 3See also Gall et al. (2014) on how FDI can increase the long-term vulnerability of countries to external shocks.

> 4Notably, our sample contains, due to the financial crisis, both increases and decreases in foreign ownership

2
in the same sector as the local firm), backward (with the MNE in a downstream industry supplied by the local firm), or forward (with the MNE in an upstream industry supplying to the local firm). In work such as Javorcik (2004), the most significant spillovers are typically backwards, although there is often some evidence in favour of horizontal spillovers. The subsequent work cited in the above surveys generally confirms this across countries and time periods. Second, the impact often depends on the characteristics of the local firm. Gorodnichenko et al. (2014) find that the size, age, and industry of the local firm has a significant effect. Damijan et al. (2013) similarly point out the role of the local firm’s technological advancement and absorptive capacity. Thus, although there is a sizable body of evidence indicating that inbound FDI increases the productivity and growth of local firms, these are conditional.

Building on this literature, we decompose our spillovers into horizontal, backward, and forward linkages. When using the standard approach where only net changes in FDI matter (i.e. where entries and exits have equal but opposite effects, which we refer to as symmetry), we find evidence that increases in net foreign ownership in a given firm, along with increases in net backward and forward spillovers, are associated with higher employment and capital growth in that firm. This symmetry, however, presupposes that all spillovers are transitory in that only the net stock of current multinationals not the history of foreign presence matters for growth. When we relax this assumption and decompose the spillover variables into the changes driven by increases in FDI and those caused by decreases, we firmly reject symmetry. In fact, we find that when FDI exits, this has a more sizable and significant effect on employment and capital growth in local firms than when FDI enters. This is particularly true for backward linkages. As such, this indicates asymmetry with a strong transitory component to the spillover effects since, if the foreign firm leaves, growth falls. In contrast, if the spillovers were permanent reflecting learning effects, then MNE exits should have no impact, since local firms have already adopted the knowledge necessary, for instance, to operate the foreign technology. Furthermore, we find that the impact of FDI on the local firm depends on its sector, size, and age. In particular, in line with Damijan et al. (2013), smaller firms are generally more affected by FDI. However, our results indicate that this is highly driven by reductions in the transitory spillovers resulting from MNE exits, especially via the backwards linkages (reflecting leaning effects of small suppliers to MNEs). This granular effect is something that they (and the rest of the existing literature) cannot identify as they consider only net spillover changes, i.e. as they impose a symmetry our estimates reject.

This evidence of transitory effects is consistent with the idea that spillovers arise from leaning effects due to higher domestic demand for locally sourced goods and services which 3
are severed once FDI leaves rather than learning effects such as technological spillovers which, once adopted, are likely to persist even after the MNE exits. Beyond improving our understanding of the nature of spillovers and the extent to which FDI promotes foreign technology diffusion among local firms in the host country, this result has important policy implications. If spillovers were permanent, then it would be sufficient to attract FDI, allow its benefits to spillover to the local economy, and permit it to leave. As such, temporary incentives that increase inbound FDI without retaining it, such as tax holidays, would be a sufficient tool for extracting the benefits of FDI.<sup>5</sup> On the other hand, if spillovers disappear when the FDI does, to sustain the benefits it is necessary to sustain the investment. This would then call for long-run structural policy approaches such as maintaining low corporate tax rates, good infrastructure, or other sustainable business friendly policies that attract and retain foreign firms.<sup>6</sup> Thus, our results suggest that if a country is seeking to increase and maintain employment and investment via FDI spillovers, the latter set of policies may be more<sup>7</sup> The rest of the paper proceeds as follows. Section 2 lays out a simple model illustrating the potential differential effects from increases and decreases in FDI on the productivity and growth of local firms. Section 3 describes our data and empirical methodology. Our results are presented in Section 4. Section 5 concludes.

# **2 Theory**

## **2.1 Model Structure**

In this section, we present a simple model to highlight the potential for asymmetric spillover effects arising from entering and exiting MNEs in order to motivate our empirical analysis. To this end, consider a representative consumer with preferences over _S_ industries, each of which is composed of a set of differentiated products. Utility for the consumer is:

> 5Klemm and Parys (2012) provide evidence on the effectiveness of tax holidays in attracting FDI.

> 6See de Mooij and Ederveen (2008) for a survey of the work on the impact of tax rates on FDI.

> 7Du et al. (2013) examine how tariff and tax reductions affected FDI across Chinese sectors and the spillovers these policies therefore created. They do not, however, examine whether such policies attracted and retained the FDI, and thus do not address asymmetries between entries and exits, nor compare temporary policies to longer lasting ones.

4
_S_ <u>1</u> _αs_ where _βs >_ 0 _∀s_ , _s_ �=1 _βs_ = 1, and _Xs ≡_ �� _j∈s_<sup>_q_(</sup><sup>_j_)</sup><sup>_αsdj_</sup> � is a “composite good” made up of the different varieties within _s_ , each of which is produced by a unique firm _j_ . Note that _αs >_ 1. The set of firms in each sector is exogenous.<sup>8</sup> Focusing on a single sector _s_ , the cost of producing _q_ ( _i_ ) units for firm _i_ is _a_ ( _yi, zs_ ) ( _αsr_ + _w_ ) which depends on a firmspecific productivity parameter _a_ ( _yi, zs_ ), the sector specific unit capital requirement _αs_ , and the factor prices of capital and labour, _r_ and _w_ .<sup>9</sup> In particular, _a_ ( _yi, zs_ ) depends on firm characteristics _yi_ and sector characteristics _zs_ . Firm characteristics can include age (where older firms are typically found to be more productive), the region in which the firm is located in, and foreign ownership (where again, firms with a degree of foreign ownership are commonly more productive). Sector characteristics, meanwhile, include spillovers from multinationals (discussed in detail below).

Using the consumer’s maximization problem, a constant share _βs_ of income _W_ will be <u>1</u> spent on sector _s_ . Furthermore, demand for firm _i_ ’s variety, where _εs_ = _αs−_ 1<sup>_>_1isthe</sup> elasticity of substitution, is _q_ ( _i_ ) = _p_ ( _i_ )<sup>_−εs_</sup> _Psεs−_ 1 _βsW_ (2) _−_ <u>1</u> _εs−_ 1 where _Ps_ = �� _j∈s_<sup>_p_(</sup><sup>_j_)</sup><sup>_−_(</sup><sup>_εs−_1)</sup><sup>_dj_</sup> � is the price index for sector _s_ . As is standard in such models, the equilibrium price for firm _i_ is a markup over marginal cost: resulting in firm output: Recalling that with this production function, labour demand is _L_ ( _i_ ) = _a_ ( _i_ ) _q_ ( _i_ ), we can write labour demand as: while capital demand is ln _K_ ( _i_ ) = _αs_<sup>_−_1ln</sup><sup>_L_(</sup><sup>_i_).Thus,ignoringeffectsoperatingthrough</sup> the price level, a reduction in _a_ ( _i_ ) should increase factor usage in firm _i_ , i.e. a rise in productivity leads to employment growth and investment.

> 8As our empirical aim is to estimate how a given firm responds to changes in its environment, something it takes as exogenous. This simplification is intended to simplify the theory with that goal in mind.

> 9This would arise if the production function is _q_ ( _i_ ) = _a_ ( _i_ )<sup>_−_1</sup> min ( _αK_ ( _i_ ) _, L_ ( _i_ )).

5
# **2.2 FDI Spillovers**

As noted above, the productivity parameter _a_ ( _i_ ) depends on both firm and sector characteristics, with the latter capturing the spillovers from FDI. Following the literature, we allow the set of spillovers to have three elements: one for horizontal spillovers _φs,tH_ (measured by the share of output in sector _s_ owned by foreigners), one for backward spillovers _φ_<sup>_B_</sup> _s,t_<sup>(mea-</sup> sured as the share of output by sector _s_ that is sold to foreign MNEs), and one for forward spillovers _φ_<sup>_F_</sup> _s,t_<sup>(measuredastheshareofinputssector</sup><sup>_s_purchasesfromforeign-ownedfirms</sup> in the country).<sup>10</sup> While we remain agnostic about the exact channel of the spillover, we do distinguish between persistent learning and transitory leaning effects, with the distinction being that whereas a transitory spillover disappears immediately upon a MNE’s exit, a persistent spillover does not, since local firms have learned from the MNE; the knowledge about the adaption of new technologies, management practices, or trade linkages has already been transferred to the local To formalize this difference, consider a MNE that is not present in period _t −_ 1, arrives in period _t_ , and then exits just before period _t_ + 1. Before the MNE enters, it generates no spillovers. After it arrives, in period _t_ , it generates a spillover equal to _ρftet_ where _ft_ is the share of the MNE that is foreign-owned and _et_ is its employment. After it exits, in _t_ + 1 its spillover is (1 _− δ_ ) _ρftet_ where 0 _≥ δ ≤_ 1. If _δ_ = 1, the FDI all spillovers are transitory and it has no effect after it leaves.<sup>11</sup> On the other hand, if _δ <_ 1, the spillover may depreciate but does not disappear immediately. If _δ_ = 0, then all spillovers are permanent.<sup>12</sup> Finally, assume that spillovers depreciate fully two periods after the MNE exits.<sup>13</sup> Thus, the extent of spillovers generated varies according to whether the firm is present and, if not, when it exited. This is summarized in Table 1.

Table 1: Total Spillovers Generated by a MNE Arriving in period _t_ and then Exiting

|Not|Present|Present|Exits before _t_+ 1<br>Exits|before _t_+ 1|
|---|---|---|---|---|
|Period<br>_t_|_−_1|_t_|_t_+ 1|_t_+ 2|
|Spillover Efect|0|_ρftet_|(1_−δ_) _ρftet_|0|

10Please note that although we speak here of intermediate input purchases, we do not model them explicitly so as to make the theory as simple as possible while still illustrating the potential for asymmetric effects from FDI entry and exit.

> 11This situation may match spillovers linking local firms to export markets.

> 12This might occur if spillovers are due to technology transfers.

> 13Obviously, this can be extended so that the persistent spillovers gradually dissipate over time, however, this formulation simplifies the discussion because spillovers then depend only on FDI over a two-period window.

6
Aggregating this up across MNEs in a given sector _s_ and, as is standard in the literature, normalizing by sectoral employment, we see that total horizontal spillovers in period _t_ depend on the number of firms of each type: The literature to date implicitly assumes that _δ_ = 1, so that all spillovers are transitory and depend solely on FDI that is currently present. Put differently, this assumption implies a symmetry between increases and decreases in FDI so that, when measured in changes over time, only net inflows of FDI matter. Nevertheless, for spillover mechanisms that are persistent, this need not be true.

Following the literature, in period _t_ for sector _s_ , we construct our backward and forward spillovers using the horizontal spillover: where _γk,s_<sup>_O_istheshareofoutputfromsector</sup><sup>_s_soldtosector</sup><sup>_k_,</sup><sup>_γ_</sup> _k,s_<sup>_I_istheshareofinputs</sup> sector _s_ sources from sector _k_ . Let the (logged) unit labour requirement be: where _age_ , _size_ , and _fgn_ denote the age, size, and foreign ownership of _i_ in _t_ . Given that older and foreign-owned firms are typically found to be more productive, we presume that _ψ_ 1 _, ψ_ 2 _<_ 0, i.e. they lower the unit labour requirement, with a similar result for productivityenhancing FDI spillovers. First differenncing (5), for firm _i_ in sector _s_ in year _t_ , labour growth is: where the “dots” indicate changes. Equation (9) then provides the basis for our empirical specification. Note that for the spillover variables, even if there is no net change in FDI levels, that there can still be a change in the spillover. For example, suppose that there is entry and exit in a sector _s_ yet total foreign employment does not change. For spillover of type _j_ , this would result in: 7
which equals zero only if _δ_ = 1, i.e. all spillovers are transitory. This would imply coefficient estimates for entries and exits that are equal but opposite in sign. On the other hand, if FDI spillovers are permanent, then _δ_ = 0 and there should be no significant effect from exits. Finally, if the coefficient is between zero and one, then this would suggest the presence of both transitory and permanent spillovers.

Note that in both of these latter two cases, it should be that the estimated effect of new FDI is greater in absolute value than for exiting FDI if entering investment creates spillovers immediately. Thus, by estimating the impact of increases and decreases in FDI separately, i.e. not assuming that _δ_ = 1, we can test for the presence of transitory versus persistent spillovers. Further, recall that in equation (8), we assumed that firm _i_ ’s firmspecific characteristics and the spillovers were additively separable. If this is not the case, then the impact of spillovers will vary across firms. This too is something we will explore in the data. Finally, just as employment growth depends on FDI, so too does capital growth, with investment responding comparably to changes in FDI.

# **3 Data Description and Empirical Strategy**

Our data come from the firm census for 2006 and 2011 from the Department of Statistics in Jordan. These data represent information of about 100,000 firms in Jordan in each year from both, manufacturing and services. We observe 15,465 firms in both periods.<sup>14</sup> These data provide several pieces of firm level information, including the employment of the firm, the share of foreign ownership, the year of incorporation, revenues, capital investment, the region it is located in, and the sector in which it operates. Together, these firms comprise 53% of employment in Jordan as compared to Labor Force Survey (LFS) data.<sup>15</sup> In studying the spillover effects of FDI, these Jordanian data have several attractive features. First, prior to 2000, FDI inflows were very low (below 1% of GDP). Since then, the government removed restrictions to FDI in manufacturing and several service sectors including banking, telecommunication, and retail trade.<sup>16</sup> As a result, net FDI inflows tripled from US$ 0.9 billion in 2000 to US$ 2.8 billion in 2008. On average, these FDI inflows amounted to 10.1 percent of GDP over the decade, a share which ranks Jordan among

> 14We use sample weights for each firm and year making the subset of firms observed in both periods representative for the entire population of more than 100,000 firms in the 2006 and 2011 firm census. As we focus on changes over this five-year period, we can only use firms for which data are available in both years.

> 15Note that LFS data typically exceed firm census employment data significantly in most countries, since they usually better cover informal employment, illegal foreign workers, family workers, etc.

> 16Note that, transport and professional (accounting and legal) services remain restricted to foreign investors (Schiffbauer et al., 2015). This motivates our sample splits between services and manufacturing.

8
the most attractive emerging economies for FDI.<sup>17</sup> Thus, Jordan experienced significant increases in FDI which have the potential to generate spillovers. Indeed, the World Bank (2012) attributes Jordanian growth over the period in no small part to these FDI inflows (with half of total investment coming from foreigners). Second, growth and FDI in Jordan were negatively impacted by the global financial crisis in 2009-2010. The external shock led to sudden stop in foreign investments which generated a quasi natural experiment allowing to test for the impact of MNE exits and thus the nature of FDI spillovers. After 2009, FDI into Jordan declined substantially and many foreign subsidiaries exited in 2009 and 2010 as MNEs adjusted their portfolios to reduce exposure to high-risk investments in developing countries. From Table 2, which presents the summary statistics, we can infer that the number of foreign-owned establishments, implying at least 10% foreign ownership, fell from 338 to 142.<sup>18</sup> As can be seen from Table 3 this observation is confirmed when looking at the share if foreign ownership considering all companies (including not foreign owned) and disaggregating the sample to the industry level. Interestingly, for foreign owned firms the share of equity hold by foreigners was quite high with roughly 70% in both years.

Nevertheless, even during the crisis, some MNEs continued to enter and expand the size of their Jordanian investment.<sup>19</sup> Thus, the Jordanian data has both increases and decreases in FDI, with this churning necessary for us to compare persistent and transitory spillovers. Third, Jordan is a setting in which local firms may be poised to take advantage of the spillovers. Overall, Jordan was a low middle income developing country that grew strongly over the last decade based on market-oriented reforms and a favorable external environment becoming a upper middle income developing country as of 2010. This suggests that its firms have the absorptive capacity to take advantage of spillovers while remaining sufficiently far from the technological frontier that they have room for adopting more efficient foreign technologies or better management practices.<sup>20</sup> Thus, the Jordanian data is well suited to the issues we investigate.

As described in equation (6), our horizontal spillover, _φ_<sup>_H_</sup> _s,t_<sup>,capturestheextentofforeign</sup> presence in sector _s_ at time _t_ , which is defined as foreign equity participation averaged over all firms in the sector, weighted by each firm’s share in sectoral employment. Using (7), the backwards spillover, _φ_<sup>_B_</sup> _s,t_<sup>,measurestheforeignpresenceintheindustriesthatare</sup> being supplied by sector _s_ , calculated as the weighted sum of the various industries _φ_<sup>_H_</sup> _k,t_<sup>’s,</sup>

> 17See Davies et al. (2015) for a discussion on the patterns in FDI in developing economies during this period.

> 18We follow the international standard defining firms as foreign owned of they report at least 10% foreign ownership.

> 19More specifically, our sample contains 284 foreign owned companies where FDI has been reduced and 82 companies which report higher levels of foreign ownership or became foreign owned in 2011.

> 20See Damijan et al. (2013) for more discussion on absorptive capacity and spillovers.

9
Table 2: Summary Statistics

|**Variable**|**Mean**|**Std. Dev.**|**Min.**|**Max.**|**N**|
|---|---|---|---|---|---|
|Employment Growth|0.01|0.51|-1.96|1.95|15465|
|Capital Growth|-0.03|0.87|-2|2|15395|
|Employees|11.26|84.09|1|4800|30930|
|Capital|299741.18|6762496.28|0|750000000|30921|
|_Fgn_ 2006|71.07|29.04|10|100|338|
|_Fgn_ 2011|68.93|30.97|13|100|142|
|Start Year|1996.69|11.03|1920|2011|30930|

with the weight being the the proportion of sector _s_ ’s output supplied to another sector _k_ . This is taken from the 2006 input-output matrix for 81 industry sectors which is matched to the 221 sectors following the 4-digit ISIC3.1 classification.<sup>21</sup> Note that inputs supplied within the sector are not included since this is already captured by _φ_<sup>_H_</sup> _s,t_<sup>.Likewise,</sup><sup>_φF_</sup> _s,t_<sup>is</sup> the share of foreign employment in upstream (or supplying) sectors feeding into _s_ , with the different sectors’ _φ_<sup>_H_</sup> _k,t_<sup>values weighted by the share of inputs</sup><sup>_s_sources from</sup><sup>_k_(again excluding</sup> within-sector purchases). As discussed above, we will decompose changes in these three variables into those arising from increases in foreign ownership ̇ + and those from declining foreign ownership. For spillover type _j ∈{H, B, F }_ , _φ_<sup>_j_</sup> _s,t_ denotes changes coming from ̇ _−_ increases in foreign ownership and _φ_<sup>_j_</sup> _s,t_ is that arising from decreases in foreign ownership.<sup>22</sup> Table 4 presents summary statistics for the changes in foreign ownership and the spillover variables, both on net and decomposed into positive and negative changes.<sup>23</sup> On net, foreign ownership and the forward and backward spillover variables fall; horizontal spillovers, meanwhile, increase. Nevertheless, regardless of which of these one considers, there is a good deal of churning (i.e. simultaneous entry and exits). In the horizontal spillovers, entries are roughly 1.6 times the size of exits (i.e. _φ_<sup>_H_</sup> _s,t_ + = _−_ 1 _._ 6 _φHs,t−_ ). For forward spillovers, on the other hand, exits are 2.3 times larger than entries. As the horizontal spillovers increased on average, this means that the exits were tilted towards those industries which purchase from Jordanian firms. Even more extreme are the backward spillovers, where exits are 26 times larger than entries. Thus, in industries which supply to Jordanian firms, reductions in

> 21As there is no input-output matrix available for 2011 we use the same shares for both years.

> 22Note that although the spillover variables can change due to relative changes in employment across firms, this decomposition is constructed only using the changes in ownership.

> 23Note that for the foreign ownership variable, a given firm either experiences an increase or a decrease. For the spillover variables, however, a given firm experiences both changes due to entries and changes due to exits. In unreported results, we measured these changes as growth rates (i.e. changes in logs). When doing so, we found more evidence that foreign ownership increases and forward exits result in higher employment growth. The other spillover results were comparable to those reported. These alternative results are available on request.

10
Table 3: Foreign Direct Investment by Sector

||**isic 1-digit**|**2006**|**2011**|
|---|---|---|---|
|**1**|Manufacturing,<br>Mining,<br>Quarrying|4.49|1.62|
|**2**|Manufacturing food paper<br>chemicals metal|1.05|0.60|
|**3**|Manufacturing ofce electri-<br>cal machinery transport fur-<br>niture|2.31|0.42|
|**4**|Electricity, gas and water<br>supply Construction|0.68|0.34|
|**5**|Wholesale and retail trade; re-<br>pair of motor vehicles; motorcy-<br>cles and personal and household<br>goods; Hotels and Restaurants|0.38|0.16|
|**6**|Transport,<br>storage<br>and<br>communications, Financial<br>intermediation|3.43|2.01|
|**7**|Real<br>estate,<br>renting<br>and<br>business<br>activities<br>Public<br>administration and defense;<br>compulsory social security|0.82|0.17|
|**8**|Education Health and social<br>work|0.27|0.09|
|**9**|Other<br>community,<br>social<br>and<br>personal service activities, Ac-<br>tivities of private households as<br>employers and undiferentiated<br>production activities of private<br>households, Extraterritorial or-<br>ganizations and bodies|0.37|0.26|
||Average|0.78|0.32|

11
Table 4: Summary Statistics of Changes in Spillover Variables

|**Variable**|**Mean**|**Std. Dev.**<br>**N**|
|---|---|---|
| ̇<br>_Fgni_ (net)<br>|-0.46|8.038<br>15465|
| ̇<br>_Fgni_<br>+ (entry)|0.166|3.692<br>15465|
| ̇<br>_Fgni_<br>_−_(exit)|-0.626|7.125<br>15465|
|Horizontal|||
| ̇_φ_<sup>_H_</sup> (net)<br>|0.01|0.127<br>15465|
| ̇_φH_<sup>+ </sup>(entry)|0.024|0.105<br>15465|
| ̇_φH_<sup>_−_</sup>(exit)|-0.015|0.066<br>15465|
|Backward|||
| ̇_φB_ (net)|-0.103|0.084<br>15465|
| ̇_φB_<sup>+ </sup>(entry)|0.004|0.028<br>15465|
| ̇_φB_<sup>_−_</sup>(exit)|-0.107|0.074<br>15465|
|Forward|||
| ̇_φF_ (net)|-0.019|0.101<br>15465|
| ̇_φF_ <sup>+ </sup>(entry)|0.013|0.054<br>15465|
| ̇_φF _<sup>_−_</sup>(exit)|-0.031|0.081<br>15465|

foreign ownership were particularly severe. These characteristics ensure sufficient variation in the data allowing us to empirically identify asymmetric spillover effects from FDI.

Our estimating equation builds from equation 9.<sup>24</sup> Specifically, following Davis et al. (1996), we let employment growth as _H_ = 2 _∗_<sup>_e_</sup> _e_<sup>_t_</sup> _t_<sup>_−_</sup> +<sup>_e_</sup> _e_<sup>_<u>t</u>_</sup> _t_<sup>_−_</sup> _−_<sup>1</sup> 1<sup>forfirm</sup><sup>_i_,insector</sup><sup>_j_,inregion</sup><sup>_r_be</sup> determined by, where all control variables are measured in differences: This growth rate measure has become standard in analysis of establishment and firm dynamics, because it shares some useful properties of log differences but also accommodates entry and exit.<sup>25</sup> In (11), _Hi_<sup>0isfirm</sup><sup>_i_’sinitialemploymentlevel,</sup><sup>_Fgn_ ̇</sup><sup>_i_measuresthechange</sup> in the share of firm’s total equity owned by foreign investors, the spillover variables are as described above, and _εi,s,r_ is the error term. We use weighted least squares estimation, weighting according to the share of a given sector in the entire economy. Note that although we have two years of data, we estimate a difference equation which nets out any firm-, region-, and sector-specific time invariant factors. That said, by including sector and region dummies

> 24Note that as we lack continuous data on firms’ revenues we cannot follow Javorcik (2004) and construct productivity measures. Therefore we focus on employment and capital growth.

> 25See for instance Haltiwanger et al. (2013).

12
_αs_ and _αr_ , we are implicitly controlling for region- and sector-specific time trends.<sup>26</sup> Finally we control for the age of the establishment by including the year the company was founded. We then decompose this into our main specification: where, to map this into the theory, we would interpret the coefficients as, using the horizontal spillover as an example, _β_ 3<sup>+=</sup><sup>_ρ_and</sup><sup>_β_</sup> 3<sup>_−_=</sup><sup>_δρ_.Notethatasexitsaremeasuredasnegative</sup> values, _β_ 3<sup>_−>_0 means that as there is less exit,</sup><sup>_φ_ ̇</sup><sup>_H_</sup> _s −_ moves towards zero, increasing spillovers. Finally, if it is only the net change in FDI that matters, then _β_ 3<sup>+=</sup><sup>_β_</sup> 3<sup>_−_,i.e.churninghasno</sup>

# **4 Results**

We begin by comparing the standard method in which only net FDI changes matter with our specification in (11). We then consider heterogenous impacts of FDI spillovers on employment and conclude by examining the role of FDI spillovers in investment decisions.

## **4.1 Baseline Results**

Table 5 presents our baseline results. In column (1), we take the standard approach that assumes only net changes in foreign ownership (and thus the spillover variables) matters. In column (2) we decompose these net changes into the positive and negative components. In column (1) we observe that increases in foreign ownership increases employment growth, although the impact is small (with a 10 percentage point increase in foreign ownership increasing growth by .01 percent). We see little evidence for horizontal spillovers which proxy for competition effects due to foreign presence. Regarding vertical spillovers we provide evidence that both backward as well as forward spillover foster employment growth. For backwards spillovers, a 10 percentage point increase in foreign employment of downstream industries would increase firm _i_ ’s employment growth by 2.67 percent. A comparable increase in the forward linkage, meanwhile, increases by 1.34 percent. Results such as these are fairly common in the existing literature. Furthermore, older firms have higher employment growth, and the initial employment level is significant and, as expected, negative.<sup>27</sup>

> 26Specifically, we include industry effects at the one digit level and regional effects at the governorate level.

> 27Please note that these coefficients are not true zeros, only very small in magnitude.

13
Table 5: Employment Growth: Net, Persistent, and Transitory Effects

||(1)<br>Net Efects|(2)<br>Persistent & Transitory Efects|
|---|---|---|
| ̇_Fgni_<br><br>|0.001*<br>(0.001)||
| ̇<br>_Fgni_<br>+||0.002<br>(0.001)|
| ̇<br>_Fgni_<br>_−_||0.001|
|||(0.001)|
| ̇_φ_<sup>_H_</sup>|0.005||
||(0.033)||
| ̇_φH_<sup>+</sup>||-0.048|
|||(0.037)|
| ̇_φH_<sup>_−_</sup>||0.162*|
|||(0.089)|
| ̇_φ_<sup>_B_</sup>|0.267***||
||(0.084)||
| ̇_φB_<sup>+</sup>||0.144|
|||(0.184)|
| ̇_φB_<sup>_−_</sup>||0.291***|
|||(0.107)|
| ̇_φ_<sup>_F_</sup>|0.134**||
||(0.060)||
| ̇_φF_ <sup>+</sup>||-0.051|
|||(0.161)|
| ̇_φF _<sup>_−_</sup>||0.114|
|||(0.078)|
|_H_<sup>0</sup><br>_i_|-0.0002***|-0.0002***|
||(0.000)|(0.000)|
|Start Year|0.002***|0.002***|
||(0.000)|(0.000)|
|Constant|-2.780***|-2.787***|
||(0.795)|(0.794)|
|Observations|15,456|15,456|
|R-squared|0.012|0.013|
|Industry Fixed Efects|Yes|Yes|
|Region Fixed Efects|Yes|Yes|

Notes: _Fgn_ ̇ _i_ denotes foreign ownership, _φ_ ̇<sup>_H_</sup> horizontal spillover, _φ_ ̇<sup>_B_</sup> backward spillover, _φ_<sup> ̇</sup><sup>_F_</sup> forward spillovers and _Hi_<sup>0isfirm</sup><sup>_i_’sinitialemploymentlevel.</sup> 14
When we allow for asymmetric effects from entries and exits in column (2), however, we see rather different results. First, we no longer find an effect of changes in foreign ownership or the forward spillover variable. This suggests that, by imposing symmetry, the estimation was overstating the significance for these variables.<sup>28</sup> Second, we now find that only the exits have a significant impact for the backward spillovers.<sup>29</sup> Not only does this suggest asymmetries, but it indicates that a perhaps more accurate description of the results for the backward spillovers in column (1) is that firms that see spillovers fall more reduce employment growth by more. In particular, the estimated coefficient of .291 is significantly different from both zero and one, suggesting that spillovers are a mix of both transitory and persistent effects. Finally, we now see a horizontal spillover which is significant at the 10 percent level and is again driven by the exits.

Thus, in order to maintain level employment, it may be necessary to encourage existing foreign firms to not disinvest even more so than seeking new investment. This seems particularly true for the industries which Jordanian firms supply to, with a somewhat smaller effect via horizontal spillovers. New investment, on the other hand, has no significant impact. One potential cause of this is that spillovers from new FDI take time to manifest, i.e. that new foreign investment during our short time horizon has yet to reveal its full benefits.<sup>30</sup> If that is indeed the case, then this suggests further differences between the spillover effects of new versus exiting FDI over short time horizons that can not be observed when using only net FDI changes as done in previous studies.

# **4.2 Heterogenous Effects of Spillovers**

As discussed above, the impact of the spillovers may vary by firm characteristics, including sector, size, and age. We explore these possibilities in Table 6. For ease of comparison, column (1) replicates the full sample results of Table 5’s column (2). First, in columns (2) and (3) we conduct a sample split across manufacturing and service sector. We do so both because of the potentially different effects of FDI as well as the fact that Jordan liberalized manufacturing investment more so than services FDI (Schiffbauer et al., 2015).

> 28Note that the p-value for _Fgn_ + _i_<sup>is0.106andveryclosetothestandardlevelofsignificance.Further-</sup> more, as explored below, we do find significant impacts for certain subsets of firms even in this expanded specification.

> 29Note that the significance of exits (declining FDI) is not driven by negative demand shocks. If we conduct a statistical test, comparing growth rates of domestic firms in sectors where FDI declines against sectors where FDI increases (at 4 digit level), we find no statistical differences for both employment growth as well as capital growth. Results are available on request.

> 30Unfortunately due to the nature of the data, we cannot separate out early new investments (in say 2007) from later ones (in 2010 for example). Alternatively, this could indicate that, since the bulk of our increases in FDI are due to expansion of existing firms rather than new entrants, that further investment by already present MNEs has no effect.

15
The two regressions reveal some notable differences. First, for manufacturing we find an impact from increases in foreign ownership of firm _i_ , where additional ownership increases employment growth (with no evidence that reductions in ownership lower growth). Second, we see that the impact from reductions in the horizontal spillover variable are attributable to manufacturing.<sup>31</sup> Conversely, the backward spillover variables are significant only for services. In addition, for services we now find significant impacts from both increases and decreases in the backward spillovers where, consistent with a mix of persistent learning and transitory leaning effects, the point estimate for entries is greater than for exits. It should be noted, however, that we cannot reject the null hypothesis for equality of these coefficients.<sup>32</sup> This result also lends some support to the notion that new entries may require time before their impacts are felt. If FDI in the service industry comes “on line” faster than that in manufacturing, something suggested by Davies and Desbordes (2016), then this may explain the difference in effects of new entries for manufacturing and services.

In columns (4) through (7), we focus on firm size, with (4) and (5) differentiating by employment (where small firms have less than 20 employees) and (6) and (7) differentiating by revenues (where small firms earn less than 80,000 Jordanian Dinar).<sup>33</sup> On the whole, we find significant spillover effects primarily for small firms, regardless of whether this is measured by employment or revenues. In particular, as in the full sample results, these seem to stem from horizontal and backward exits. One interpretation of these results is that, in order to benefit from FDI spillovers, a given firm must be sufficiently far from the technological frontier, i.e. that it has room to grow. Evidence for this is found in Chinese data by Hu et al. (2005) and across OECD countries by Griffith et al. (2004). In addition, we find that, at least for high revenue firms, that higher foreign ownership in the firm itself is linked with higher employment growth.

Finally, columns (8) and (9) split our sample between old firms (those founded before 1990) and young ones. Overall, we find that older firms are more sensitive to FDI spillovers, a finding consistent with Gorodnichenko et al. (2014). Specifically, we provide evidence that more foreign ownership of firm _i_ increases growth, with a slightly greater effect from increases in foreign ownership than from decreases. Foreign ownership of firm _i_ , however, has no significant impact among the younger firms. Older firms are also affected by horizontal

> 31If we control for sector which attract more FDI as compared to sectors where FDI is leaving we find evidence that this effect is driven by sectors where FDI activity is reduced. In sectors where FDI activity is increasing we find in turn evidence that competition spillover matters. Results are available on request.

> 32The F-statistic for this test was 1.33, resulting in a p-value of 0.25.

> 33Gorodnichenko et al. (2014) use a similar threshold. Our threshold separates the top 5% of companies from the remainder.

16
|(9)<br>Young|0.001<br>(0.001)<br>0.000<br>(0.001)<br>-0.039<br>(0.041)<br>0.101<br>(0.103)<br>0.118<br>(0.212)<br>0.232*<br>(0.120)<br>-0.249<br>(0.170)<br>0.133<br>(0.087)<br>-0.000***<br>(0.000)<br>0.000<br>(0.001)<br>-0.145<br>(1.877)<br>12,001<br>0.013<br>Yes<br>Yes<br>oyees,<br>s than<br>|
|---|---|
|(8)<br>Old|0.010***<br>(0.003)<br>0.003*<br>(0.002)<br>-0.110<br>(0.088)<br>0.325*<br>(0.183)<br>-0.044<br>(0.369)<br>0.464**<br>(0.232)<br>0.459<br>(0.344)<br>0.084<br>(0.189)<br>0.000<br><br>(0.000)<br>0.002*<br>(0.001)<br>-3.643**<br>(1.855)<br>3,464<br>0.028<br>Yes<br>Yes<br>n 20 empl<br>s are frm<br>afterwards.|
|(7)<br> High Rev|0.005** <br>(0.002)<br>0.001<br>(0.001)<br>-0.058<br>(0.158)<br>-0.059<br>(0.210)<br>-0.251<br>(0.402)<br>-0.042<br>(0.242)<br>-0.303<br>(0.267)<br>0.485*<br>(0.283)<br> -0.000**<br>(0.000)<br>0.002*<br>(0.001)<br><br>-4.041*<br>(2.255)<br>2,222<br>0.028<br>Yes<br>Yes<br> more tha<br>venue frm<br> business|
|(6)<br>Low Rev|0.000<br>(0.001)<br>0.001<br>(0.001)<br>-0.040<br>(0.038)<br>0.173*<br>(0.092)<br>0.206<br>(0.207)<br>0.380***<br>(0.117)<br>0.053<br>(0.196)<br>0.059<br>(0.082)<br> -0.009***<br>(0.002)<br>0.001***<br>(0.000)<br> -2.407***<br>(0.841)<br>13,243<br>0.029<br>Yes<br>Yes<br> frms with<br> and low re<br>ms started|
|(5)<br>Large|0.002<br>(0.002)<br>0.000<br>(0.001)<br>0.358<br>(0.348)<br>0.293<br>(0.203)<br>-0.199<br>(0.552)<br><br>-0.367<br>(0.335)<br>0.025<br>(0.348)<br>0.070<br>(0.208)<br> -0.000***<br>(0.000)<br>0.004**<br>(0.001)<br>-7.202** <br>(2.853)<br>860<br>0.134<br>Yes<br>Yes<br> frms are<br>ian Dinar <br>, young fr|
|(4)<br>Small|0.000<br>(0.001)<br>0.000<br>(0.001)<br>-0.059<br>(0.036)<br>0.161*<br>(0.083)<br>0.206<br>(0.182)<br>0.421***<br>(0.117)<br>-0.001<br>(0.156)<br>0.149*<br>(0.079)<br>-0.029***<br>(0.008)<br>0.001**<br>(0.000)<br>-1.422<br>(0.867)<br>14,605<br>0.079<br>Yes<br>Yes<br>oyees, big<br>00 Jordan<br>fore 1990|
|(3)<br>Manufact.|0.007***<br>(0.002)<br>0.000<br>(0.001)<br>-0.321<br>(0.308)<br>0.280**<br>(0.136)<br>0.044<br>(0.224)<br>0.092<br>(0.158)<br>0.418<br>(1.057)<br>0.005<br>(0.106)<br>-0.000<br>(0.000)<br>-0.000<br>(0.001)<br>1.070<br>(2.145)<br>2,441<br>0.022<br>Yes<br>Yes<br>n 20 empl<br> than 800<br>ounded be|
|(2)<br>Services|0.001<br>(0.001)<br>0.001<br>(0.001)<br>-0.037<br>(0.037)<br>0.163<br>(0.127)<br>1.577*<br>(0.884)<br> 0.539***<br>(0.172)<br>0.199<br>(0.231)<br>0.337<br>(0.384)<br> -0.000**<br>(0.000)<br> 0.002***<br>(0.000)<br> -4.723***<br>(0.874)<br>12,828<br>0.015<br>Yes<br>Yes<br>ith less tha<br>t earn more<br> are frms f|
|(1)<br>H|0.002<br>(0.001)<br>0.001<br>(0.001)<br>-0.048<br>(0.037)<br>0.162*<br>(0.089)<br>0.144<br>(0.184)<br>0.291*** <br>(0.107)<br>-0.051<br>(0.161)<br>0.114<br>(0.078)<br>-0.000***<br>(0.000)<br>0.002*** <br>(0.000)<br>-2.787***<br>(0.794)<br>15,465<br>0.013<br>Yes<br>Yes<br>s frms w<br> frms tha<br>shold, old|
|| ̇<br>_Fgni_<br>+<br> ̇<br>_Fgni_<br>_−_<br> ̇_φH_+<br> ̇_φH−_<br> ̇_φB_+<br> ̇_φB−_<br> ̇_φF_+<br> ̇_φF −_<br>_H_0<br>_i_<br>Start Year<br>Constant<br>Observations<br>R-squared<br>Industry Fixed Efects<br>Region Fixed Efects<br>Notes: Small represent<br>high revenue frms are <br>earn less than this thre|

17
exits whereas we find no such effect for younger firms. Finally, note that while both are impacted by backward exits, the coefficient is twice as large for old firms than for young<sup>34</sup> Summarizing these estimates, we see not only evidence on the existence of spillover effects with asymmetries between entries and exits, but heterogeneity across sectors and firms. Overall, we find that foreign ownership of a given firm tends to be associated with higher employment growth for older firms, those in manufacturing, and those with high revenues. In addition, we find evidence of horizontal and backward spillovers. These, too, vary across firms, with horizontal effects more evident in manufacturing and small firms. Backward spillovers are also more in evidence for small firms. Unlike the horizontal spillovers, however, they manifest more in services and both old and young firms. Furthermore, throughout our analysis, we find evidence of asymmetries between FDI entries and exits, with the coefficients highly suggestive of an important role for transitory spillovers reflecting leaning effects instead of knowledge transfers from MNEs to local firms and of potential lags before the effects of new entries manifest themselves.

# **4.3 Capital Growth**

In the theory, we focused on employment growth, however, it also allowed for FDI spillovers onto the capital investment of local firms (albeit in an admittedly specialized fashion due to the Leontief production technology). Thus, here we also examine the impact of FDI on the investment decision. In particular, this is worth consideration in light of studies such as Borenzstein et al. (1998) who find that greater FDI investment spurs local capital investment. With this in mind, we employ the same strategy as above, replacing our dependent variable with capital growth and calculating the spillover variables in the same fashion as before using capital stock instead of employment. Table 7 contains the summary statistics of the relevant variables. Although the foreign ownership and backward spillovers are comparable between this and the employment-based measures, there are two notable differences between this and Table 4. First, even though the net change in the horizontal spillover is comparable in the employment- and capital-based measures, the latter exhibits more churning. Second, the net forward spillover variable is more negative for the capital-based measure, something driven by markedly higher exits.

Tables 8 and 9 are the capital growth equivalents of the employment growth results in Tables 5 and 6. Overall, our findings are robust to using employment or capital growth - both measures yield consistent results. Beginning with the net effects in column (1) in Table

> 34Although twice as large, a test on the equality of the two coefficients fails to reject that those coefficients are the same at standard levels of

18
Table 7: Summary Statistics Changes in Spillover Variables for Capital

|**Variable**|**Mean**|**Std. Dev.**<br>**N**|
|---|---|---|
|Capital Growth<br>|-0.03|0.87<br>15395|
| ̇_Fgni_<br>|-0.45|8.04<br>15395|
| ̇<br>_Fgni_<br>+|0.17|3.7<br>15395|
| ̇<br>_Fgni_<br>_−_|-0.62|7.09<br>15395|
|Horizontal|||
| ̇_φH_<br>|0.01|0.19<br>15395|
| ̇_φH_<sup>+</sup>|0.04|0.17<br>15395|
| ̇_φH_<sup>_−_</sup>|-0.03|0.07<br>15395|
|Backward|||
| ̇_φB_|-0.1|0.07<br>15395|
| ̇_φB_<sup>+</sup>|0|0.03<br>15395|
| ̇_φB_<sup>_−_</sup>|-0.11|0.05<br>15395|
|Forward|||
| ̇_φF_|-0.17|0.15<br>15395|
| ̇_φF_ <sup>+</sup>|0.01|0.07<br>15395|
| ̇_φF _<sup>_−_</sup>|-0.18|0.11<br>15395|

8, we find comparable quantitative results, although the net forward spillover coefficient is now insignificant. In column (2), as in Table 5 we find significant evidence of asymmetries. First, we find that only increases in the foreign ownership of firm _i_ have a significant impact (where they increase growth). Similarly, we find differences in the impact of entries and exits in the industries firm _i_ supplies where as before, the impact of exits are greater than entries. Note, that we now find some effect from entries significant at the 10% level. Forward spillovers, however, have no effect (as was true using the employment-based measures) nor do horizontal spillovers (where, unlike Table 5, we find no significant effects from exits).

In Table 9, where we allow for heterogenous impacts from the spillovers, we again provide evidence of such, although the pattern is slightly different. First, in contrast to Table 6, we find that foreign ownership in firm _i_ has a significant effect only for services. Second, we find that entries in the backwards spillovers seem to increase investment in manufacturing, not in services. Exits in this variable, however, have an effect comparable to before, indicating some degree of persistence for manufacturing. Third, we now estimate a significant impact on horizontal exits in services, not manufacturing. Despite these differences, which may be driven by the relative importance of labour in services as compared to capital in manufacturing, we find evidence of asymmetric effects of entries and exits and that there is significant evidence of transitory effects from FDI spillovers. Turning to the firm size effects in columns 19
Table 8: Spillover Effects on Capital Growth

||(1)<br>Net Efects|(2)<br>Persistent & Transitory Efects|
|---|---|---|
| ̇<br>_Fgni_|0.002**||
| ̇<br>|(0.001)||
|_Fgni_<br>+<br>||0.007***<br>(0.002)|
| ̇<br>_Fgni_<br>_−_||0.001|
| ̇||(0.001)|
|_φH_|0.004||
||(0.037)||
| ̇_φH_<sup>+</sup>||-0.018|
|||(0.040)|
| ̇_φH_<sup>_−_</sup>||0.157|
|||(0.130)|
| ̇_φB_|0.558***||
||(0.138)||
| ̇_φB_<sup>+</sup>||0.377*|
|||(0.221)|
| ̇_φB_<sup>_−_</sup>||0.681***|
| ̇||(0.200)|
|_φF_|0.026||
||(0.109)||
| ̇_φF_ <sup>+</sup>||0.009|
|||(0.188)|
| ̇_φF _<sup>_−_</sup>||0.038|
|||(0.189)|
|_H_<sup>0</sup><br>_i_|-0.000|-0.000|
||(0.000)|(0.000)|
|Start Year|-0.000|-0.000|
||(0.001)|(0.001)|
|Constant|0.335|0.350|
||(1.352)|(1.352)|
|Observations|15,393|15,393|
|R-squared|0.016|0.016|
|Industry Fixed Efects|Yes|Yes|
|Region Fixed Efects|Yes|Yes|

Notes: _Fgn_ ̇ _i_ denotes foreign ownership, _φ_ ̇<sup>_H_</sup> horizontal spillover, _φ_ ̇<sup>_B_</sup> backward spillover, _φ_<sup> ̇</sup><sup>_F_</sup> forward spillover and _Hi_<sup>0isfirm</sup><sup>_i_’sinitialemploymentlevel.</sup> 20
|(9)<br>Young<br>0.007***<br>(0.002)<br>0.001<br>(0.001)<br>0.006<br>(0.045)<br>0.097<br>(0.143)<br>0.310<br>(0.247)<br>0.743***<br>(0.230)<br>0.301<br>(0.224)<br>-0.084<br>(0.215)<br>-0.000<br>(0.000)<br>-0.002<br>(0.002)<br>3.530<br>(3.186)<br>11,972<br>0.016<br>Yes<br>Yes<br> employees,<br> frms than<br>ards.|
|---|
|(8)<br>Old<br>-0.002<br>(0.002)<br>0.003<br>(0.003)<br>-0.084<br>(0.081)<br>0.378<br>(0.287)<br>0.748<br>(0.471)<br>0.506<br>(0.405)<br>-0.716**<br>(0.348)<br>0.338<br>(0.431)<br>0.000<br>(0.000)<br>-0.000<br>(0.002)<br>0.593<br>(3.062)<br>3,421<br>0.025<br>Yes<br>Yes<br> than 20 <br> frms are<br>ess afterw|
|owth<br>(7)<br> High Rev<br>0.001<br>(0.002)<br>0.001<br>(0.002)<br>0.066<br>(0.137)<br>-0.128<br>(0.259)<br>1.222**<br>(0.490)<br>-0.429<br>(0.356)<br>0.261<br>(0.331)<br>-0.325<br>(0.406)<br>-0.000<br>(0.000)<br>0.002<br>(0.002)<br>-3.840<br>(3.832)<br>2,205<br>0.031<br>Yes<br>Yes<br>with more<br>w revenue <br>rted busin|
|apital Gr<br>(6)<br>Low Rev <br>0.009***<br>(0.003)<br>0.003<br>(0.002)<br>-0.020<br>(0.041)<br>0.327**<br>(0.152)<br>0.260<br>(0.241)<br>1.002***<br>(0.242)<br>-0.088<br>(0.235)<br>0.174<br>(0.220)<br><br>-0.000<br>(0.000)<br>-0.000<br>(0.001)<br>0.204<br>(1.449)<br>13,188<br>0.021<br>Yes<br>Yes<br> are frms <br>nar and lo<br> frms sta|
|ects on C<br>(5)<br>Large<br><br>-0.000<br>(0.003)<br>0.001<br>(0.002)<br>0.542<br>(0.379)<br>0.324<br>(0.371)<br>1.260<br>(0.768)<br><br>-0.661<br>(0.501)<br>0.951*<br>(0.485)<br>-1.162*<br>(0.689)<br>-0.000**<br>(0.000)<br>0.002<br>(0.003)<br>-5.181<br>(5.341)<br>842<br>0.071<br>Yes<br>Yes<br>ig frms <br>anian Di<br>90, young|
|illover Ef<br>(4)<br>.<br>Small<br>0.008***<br>(0.003)<br>0.001<br>(0.002)<br>-0.021<br>(0.040)<br>0.182<br>(0.139)<br>0.332<br>(0.228)<br>0.827***<br>(0.215)<br>-0.052<br>(0.201)<br>0.111<br>(0.199)<br>-0.000<br>(0.000)<br>0.000<br>(0.001)<br>-0.164<br>(1.397)<br>14,551<br>0.018<br>Yes<br>Yes<br>ployees, b<br>0000 Jord<br> before 19|
|genous Sp<br>(3)<br> Manufact<br>0.002<br>(0.001)<br>-0.001<br>(0.002)<br>1.186*<br>(0.629)<br>-0.315<br>(0.212)<br>0.579**<br>(0.231)<br>0.105<br>(0.307)<br>-0.650<br>(0.753)<br>-0.597<br>(0.491)<br>-0.000<br>(0.000)<br>0.001<br>(0.002)<br>-1.466<br>(3.301)<br>2,441<br>0.022<br>Yes<br>Yes<br>han 20 em<br>ore than 8<br>s founded|
|Table 9: Hetero<br>(1)<br>(2)<br>K<br>Services <br>0.007*** 0.008***<br>(0.002)<br>(0.002)<br>0.001<br>0.002<br>(0.001)<br>(0.002)<br>-0.018<br>-0.025<br>(0.040)<br>(0.040)<br>0.157<br>0.266*<br>(0.130)<br>(0.158)<br>0.377*<br>-0.243<br>(0.221)<br>(1.513)<br>0.681*** 0.994***<br>(0.200)<br>(0.321)<br>0.009<br>0.062<br>(0.188)<br>(0.201)<br>0.038<br>0.029<br>(0.189)<br>(0.232)<br>-0.000<br>0.000<br>(0.000)<br>(0.000)<br>-0.000<br>-0.000<br>(0.001)<br>(0.001)<br>0.350<br>-0.225<br>(1.352)<br>(1.615)<br>15,393<br>12,758<br>0.016<br>0.018<br><br>Yes<br>Yes<br>Yes<br>Yes<br>ts frms with less t<br> frms that earn m<br>eshold, old are frm|
| ̇<br>_Fgni_<br>+<br> ̇<br>_Fgni_<br>_−_<br> ̇_φH_+<br> ̇_φH−_<br> ̇_φB_+<br> ̇_φB−_<br> ̇_φF_+<br> ̇_φF −_<br>_H_0<br>_i_<br>Start Year<br>Constant<br>Observations<br>R-squared<br>Industry Fixed Efects<br>Region Fixed Efects<br>Notes: Small represen<br>high revenue frms are<br>earn less than this thr|

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(4) through (7), we find that whether size is measured as employment or revenue, increased foreign ownership in firm _i_ is associated with greater investment for low revenue and small firms. As before, we only see a significant impact of horizontal spillovers for the small firms, and then only in exits. Similarly, we find that backward exits affect small and low revenue firms only. Unlike the previous results, however, we do find an impact of backward entries on high revenue firms. Testing the coefficient estimates we find a significant and persistent effect of backward spillovers.<sup>35</sup> Also different from the results of Table 6, we find some slight significance of the forward spillover results, although this is only for the large employers. In any case, these firm size results lend further support to asymmetric effects and transitory spillovers, particularly when FDI exits those sectors supplied by small firms. Finally, in the age results of columns (8) and (9), we find little significance of the spillovers, although as before we find a significantly positive effect from backward exits on young firms suggestive of transitory spillovers.

Thus, while there are some differences between the employment- and capital-based results, three lessons stand true. First, we provide evidence that using the net change in spillovers conceals important asymmetries between FDI entry and exit. Second, we find significant evidence of transitory leaning effects since, if spillovers were to originate from permanent learning effects, exits should have no impact on the behaviour of local firms. Third, we show that changes in the backward spillovers, and particularly when driven by exits, have the most robust impacts. Fourth, we find that the asymmetric transitory spillovers from FDI are particularly strong for service sector and smaller firms. This implies that the existing literature focusing exclusively on net changes in FDI is missing important aspects of the spillover process.

# **5 Conclusion**

One of the prime reasons governments aim to attract foreign investment is the belief that, by bringing in new technologies, ways of doing business, and global connections, multinationals will increase the productivity, employment, and investment of local firms. Although there is a large body of evidence supporting these effects, heretofore no one has investigated whether these effects are persistent learning spillovers, remaining after the foreign firm disinvests, or transitory leaning effects, meaning that in order to maintain the spillover it is necessary to prevent exit. We fill this gap using Jordanian firm level data during a period of both entry and exit by foreign firms. On the whole, we find notable asymmetries between entry and exit of foreign firms, with the estimates indicating a significantly transitory nature of FDI

> 35F-stat(1,2175)=6.21, P-value=0.01.

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spillovers. In particular, we find that exits by multinationals in the sectors a given firm supplies tends to reduce both employment and capital growth. If spillovers were entirely persistent as local firms have learned to adapt the foreign technology there should be no such effect. In addition, we find that the impact of these spillovers varies across sectors and firm size, with small firms in the services industries being particularly affected.

Recognizing the asymmetric effects of entries and exits not only provides a more nuanced understanding of the nature of spillovers (suggesting, for example, that they may be more due to demand effects for locally sourced goods and services rather than technology sharing) but also has important implications for policies. Transitory policies to attract FDI, such as tax holidays, may be useful in attracting new investment, however, once they expire that investment may well leave. If, as our evidence suggests, FDI spillovers have a strong transitory component, then a policy maker, seeking to create sustained employment and investment growth, may find such policies ineffective. Instead, it may be more beneficial to focus on more long-run policies that both attract and retain foreign firms such as low corporate tax rates and efficient regulatory environments. Furthermore, in order to maximize these benefits, such policies may find it desirable to focus on the industries supplied by smaller firms. The significant transitory nature of FDI spillovers also highlights that technology transfers from MNEs to local firms are far from being automatic and may instead require substantial investments of the local firms in, e.g, complementary skills. This would provide some justification for the FDI-attracting policies in China that forced MNEs to enter some sectors through joint ventures with local firms or in Malaysia which subsidized training provided by MNEs to local firms that can potentially supply goods and services to the MNE.<sup>36</sup> With this in mind, our findings contribute to an important refinement of our understanding of both FDI spillovers and the potential effect of policy.

> 36See, for example, Rodrik (2004) or Sutton (2005).

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