Three Essays on the Impact of Foreign Direct Investment on Productivity

This thesis attempts to provide a better understanding of the role of inward foreign direct investment (FDI) and the productivity relationship by providing both a theoretical and empirical contribution to the existing literature.

Chapter 2 studies how inward FDI can affect economic growth. We extend a leader-follower endogenous growth model and highlight theoretically the endogeneity of FDI in a regression on growth, where FDI acts as a bridge linking technology transfer to firms' adaptation activities, which enable developing countries to catch-up with developed countries. We empirically test the main predictions of our theoretical model and we find positive and statistically significant effects of FDI on the relative level of GDP per capita.

The subsequent chapter investigates whether current measures of vertical linkages capture the spillover effects from multinational firms to domestic firms. We construct measures of vertical linkages at the firm-level to include the differences in firms' sourcing and supplying strategies within an industry and to better measure vertical spillovers derived from multinational activities. Our newly constructed measures show how the differences in sourcing and supplying activities across firms determine the advent of vertical spillovers.

In chapter 4, we exploit alternative mechanisms through which the productivity of domestic firms rises. Our empirical findings suggest that the presence of foreign ownership alters firms' core product competences, skewing firms' production towards their most profitable product lines and then raising firms' productivity. However, the presence of foreign ownership also increases product market competition by reducing markups across all product lines, and this effect further alters firms' production towards their core varieties.