Host Country of Foreign Investment

NBER WORKING PAPERS SERIES

HOST COUNTRY BENEFITS OF FOREIGN INVESTMENT

Magnus BlomstrOrn

Working Paper No. 3615

NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 1991

This paper is part of NBER 's research program in International Studies. Any opinions expressed are those of the author and not those of the National Bureau of Economic Research.

NBER Working Paper #3615 February 1991 HOST COUNTRY BENEFITS OF FOREIGN INVESTMENT

ABSTRACT

This

paper reviews the empirical evidence on the very

different conclusions that can be drawn about productivity

spillovers of foreign direct investment. It explains the concept of host country spillover benefits, describes the various forms these benefits can take, both within and between industries, and summarizes the evidence regarding the relative magnitudes of the

various forms of spillovers. Moreover, the paper discusses host country policy measures which can accelerate both the BC affiliates ' technology imports and the diffusion of their technology in the host economies.

Magnus BlomstrOm Stockholm School of Economics P.O. Box 6501 113 83 Stockholm, SWEDEN

HOST COUNTRY BENEFITS OF FOREIGN INVESTMENT*

Magnus Blomström

1. Introduction
The possibility of getting access to modern technology is

perhaps the most important reason why countries wish to attract

foreign investment. By inviting multinational corporations
(MNC5), host countries may get access to technologies that they

cannot produce by themselves. Foreign direct investment can also lead to indirect productivity gains for host country firms

through the realization of external economies. Generally these benefits are referred to as "spillovers", which indicates the importance of the way in which the influence is transmitted.

There are several ways in which technology spillovers may

occur. Multinational firms may, for instance, increase the degree of

References: Balasubramanyam, U. N., International Transfer of Technology to India. New York, Praeger, 1973. Bernstein, J. I., "The Structure of Canadian Interindustry R&D Spillovers, and the Rates of Return to R&D." Journal of Industrial Economics, 37 (3), 1989. Bernstein, J. I. and M. I. Nadiri, "Research and Development and Intraindustry Spillovers: An Empirical Application of Dynamic Duality." Review of Economic Studies, 56, 1989. Blomstrtin, M., "Foreign Investment and Productive Efficiency: The Case of Mexico." Journal of Industrial Economics, 15 (1), 1986. Blomstrdm, M., Foreign Investment and Spillovers: A Study of Technology Transfer to Mexico. London, Routledge, 1989. Blomstrdm, M. and P. Meller, Eds., Diverging Paths. Comparing a Century of Scandinavian and Latin American Economic Development. Baltimore, Johns Hopkins, 1991. Blomstrbm, M. and H. Persson, "Foreign Investment and Spillover Efficiency in an Underdeveloped Economy: Evidence from the Mexican Manufacturing Industry." World Development, 11 (6), 1983. Caves, R.E., "Multinational Firms, Competition, and Productivity in Host-Country Markets." Economica, 41, 1974. Caves, R.E., Multinational Enterprise and Economic Analysis. Cambridge, Cambridge University Press, 1982. 29 Dunning, J., "Multinational Enterprises, Market Structure, Economic Power and Industrial Policy." Journal of World Trade Law, 8, 1974. Eliasson, G., et al., De Svenska Storfdretagen. (Large Swedish Companies) , Stockholm, Industriens Utredningsinstitut, 1985. Forsyth, D., U.S. Investment in Scotland. New York, Praeger, 1972. Gorecki, P.K., "The Determinants of Entry by Domestic and Foreign Enterprises in Canadian Manufacturing Industries: Some Comments and Empirical Results." Review of Economics and Statistics, 58 (4), 1976. Grosse, R., Multinatiopals in Latin America. London, Routledge, 1989. Jaffe, A. B., "Technology Opportunity and Spillovers of R&D: Evidence from Firms ' Patents, Profits, and Market Value." American Economic Review, 76, 1986. Katz, J.M., Ed., Technology Generation in Latin American Manufacturing Industries. New York, St. Martins Press, 1987. Knickerbocker, F.T., "Market Structure and Market Power Consequences of Foreign Direct Investment by Multinational Companies." Occasional Paper No. 8, Washington, DC., Center for Multinational Studies, 1976. (3) , 1980. OECD, New Technologies in the 1990s. A Soclo—economic Strategy. Paris, OECD, 1988. Scherer, F.M., "Interindustry Technology Flows and Productivity Growth." Review of Economics and Statistics, 64, 1982. Shelp, R.K., et. al, Service Industries and Economic Development. New York, Praeger, 1984. Swedenborg, B., Den svenska industrns utlandsinvesteringar 1960—1986. (Swedish Investment Abroad 1960—1986) Stockholm, Industriens Utredningsinstitut, 1988. Yoshihara, K., The Rise of Ersatz Capitalism in South—East Asia. Oxford, Oxford University Press, 1988. Zejan, M., "R&D Activities in Affiliates of Swedish MNEs." Scandinavian Journal of Economics, 92 (3), 1990.