DP3384 | Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?

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Are there productivity spillovers from FDI to domestic firms, and, if so, how much should host countries be willing to pay to attract FDI? To examine these questions we use a plant-level panel covering UK manufacturing from 1973 through 1992. Across a wide range of specifications, we estimate a significantly positive correlation between a domestic plant?s TFP and the foreign-affiliate share of activity in that plant?s industry. This is consistent with positive FDI spillovers. We do not generally find significant effects on plant TFP of the foreign-affiliate share of activity in that plant?s region. Typical estimates suggest that a 10 percentage-point increase in foreign presence in an UK industry raises the TFP of that industry?s domestic plants by about 0.5%. We also use these estimates to calculate the per-job value of these spillovers. These calculated values appear to be less than per-job incentives governments have granted in recent high-profile cases, in some cases several times less.