Article analysis: productivity spills of FDI in developing markets

Author: Iloka Benneth Chiemelie 

Published: 8 /12/ 2013

Analyse and evaluate the argument presented in the article

From the introduction, the authors made known the two main arguments they will stress on in the overall paper, and they are: to understand if there are productivity spill overs from FDI to domestic firms, and if so how much should the host nation be willing to pay in order to attract FDI.

The argument presented by the authors is that a number of models in functionality of multinational firms have this assumption that foreign firms enter host nations with vast amount of knowledge based capital and as such they can deploy these knowledge capital in plants operate din the host nation (for example, see Carr, MarKusen, & Maskus, 2001; and Dunning, 1981). If that is the case, the authors then believe that these firms can spill over knowledge to local firms through training given to the workforce which the local firms will then tap.

Basically, this is an incomplete and one sides argument based on the fact that it is not all FDI firms that engage in training. There are numerous cases of turnkey project being purely designed and built by the company in its parent firm, then sent to the host nation just for coupling and establishment, which limits the potential of the workforce to acquire new skills in terms of productivity and management that can be used to boost productivity in the domestic firms. Additionally, the products offered by MNCs are very expensive to establish and demand sophisticated technologies and skills, which will then serve as a barrier for the local firms to adopt such productivity approach. As such, there is a need for the authors to present ideas and arguments based on general conception by considering all areas instead on focusing directly on the benefits of FDI to local firms as limitations still abide.

Methodology used by the authors to examine the effects of inward FDI on local productivity

From the paper, the authors adopted a regress domestic-plant output on domestic-plan-level inputs, and measured the foreign presence in the plant’s industry and region, and other control regressors. In terms of conducting an interpretation of the finding, the coefficient was estimated by the authors in terms of the FDI regressors. Basically, the authors adopted a fresh view to the case by making use of a plant-level panel for all UK manufacturing from 1973 to the period of 1992, in cases where each of the plants being reviewed have reports on information about its nationality of ownership.

Basically, the methodology is a comparative (qualitative) approach which studies the performance of companies from different years as it relates to the influence of FDI on the performance of domestic firms. This is not the right methodology to be used for this analysis. Since the research is based on understanding the influence of FDI spill over on performance of domestic firms, one would easily think that the best approach would be an in-depth interview or quantitative (questionnaire survey) research with the local firms and to understand how FDI has influence the productivity of the workforce and as such influenced the productivity of the company.

How far do their conclusions confirm or change any prior views you might have had based on your own experience or knowledge?

Not that much, but they are interesting findings.

First – the finding is that the per-job value of spill over is less than the per-incentive value of spill over, which is interesting in the sense that I was always thinking that the per-job value should be higher than the per-incentive value. Although foreign firms are known to boost incentives, one would always think that the job boost will be higher because you first need to get people working before even talking of their incentives. In any case, there are always chances of such being correct because of the value of the British currency, which means that MNCs can actually be paying more for less employment as compared with their host nation.

Second – the finding doesn’t find a significant effect of foreign share of employment within regions. One would easily think that foreign firms would have significant regional influence on employment as they would be better positioned to attract more workforces with their market value and incentive design. In any case, this is still similar with the currency effect stated earlier in which it was made known that the UK currency will probably be having an influence on the employment level of foreign firms.

Conclusion

The paper is purely mixed in terms of the argument, methodology and finding as it relates to my earlier believe in the sense that they are different. The argument is specific but I think it should be broad, the methodology is estimation but I think it should be survey study, and finally the findings are conflicting with earlier assumptions but this could be because of the currency influence I have discussed above.

References

Carr, David L., James R. Markusen, and Keith E. Maskus, “Estimating the Knowledge-Capital Model of the Multinational Enterprise,” American Economic Review 91:3 (2001), 693–708.

Dunning, J. H., International Production and the Multinational Enterprise (London: George, Allen, and Unwin, 1981).