3.2 Numerical Methods for Integrations
4.1.3 Optimization
Endogenous growth theories stress the importance of human capital accu-mulation and technological externalities in the growth process. These the-ories emphasize that FDI can increase the existing stock of knowledge in the recipient country through labour training, skill acquisition and diffusion, and the introduction of alternative management practices and organizational arrangements. In sum, FDI is expected to be a potential source of productivity gains via spillovers to local firms. In this sense, inward FDI raises economic growth by generating technological diffusion from the developed world to host countries. FDI offers know-how and technology (the most advanced production and organization methods) which are proprietary to the investors (the MNEs). Therefore, MNEs are seen as a natural and powerful vehicle of technology transfer to less devel-oped economies (UNCTAD, 1992).
As De Mello (1997) stated in his survey about FDI and growth in devel-oping countries, ‘whether FDI can be deemed to be a catalyst for output growth, capital accumulation and technological progress is a less contro-versial hypothesis in theory than in practice’. And nowadays, this conclu-sion seems to be truer. Navaretti and Venables (2004), in a recent book, alert us in the beginning of a brief survey that findings of cross-country
growth regressions embedded in endogenous growth models, the usual way to check for spillovers, are quite mixed and rarely conclusive. Really, the empirical macroeconometric literature utilising cross-section, time series or panel data, provides opposite results, not only about the existence of a significant link between FDI and growth and the sign of this relation-ship, but also about the causal relationship between both variables. As Nunnenkamp and Spatz stated, ‘these results are based on FDI flows which are not corrected for potential endogenity biases (i.e., higher economic growth causing higher FDI inflows)’ (Nunnenkamp and Spatz, 2003, p. 4).
Carkovic and Levines paper faces this problem (Carkovic and Levine, 2002). They find that there is no reliable cross-country empirical evidence supporting the claim that FDI per se (exogenously) accelerates economic growth, even when the above elements are controlled.
Despite the above stated, a question remains: are we overlooking posi-tive impacts that occur at a micro level (industry or firm) that we can not see with macromodels using aggregated FDI data? There is also a lot of micro empirical work trying to prove the existence of spillovers, the term that encompasses all the external effects that MNEs may exert upon local firms in the host country.
In order to organize the analysis of spillovers, it is practical to separate them into those that may pass horizontally to local competitors (at an intra-industry level) or vertically to local suppliers or customers (interintra-industry level, up and down).
In the case of positive intraindustry spillovers, there are several channels through which these spillovers can be generated:
● By copying, imitation and demonstration effect (Wang and Blomström, 1992; Blomström and Kokko, 1996, Görg and Strobl, 2001).
Demonstration effect involves exposure to the superior technology of MNC, possibly leading localfirms to update their own production methods (Saggi, 2000).
● By worker mobility (Fosfuri et al., 1998; Glass and Saggi, 1999).
● By access to foreign markets (Aitken et al., 1997).
● By increased competition from foreign enterprises, improvement in resource allocation and reduction of X inefficiencies (Wang and Blomström, 1992)
However, negative or non-existent horizontal spillovers can also be generated:
● MNEs have an incentive to protect and avoid such spillovers (their ownership assets or advantages) to competitors by formal protection
of their intellectual property through patents, trade secrecy, and so on (Smarzynska and Spatareanu, 2005).
● By efficiency wages: by paying higher wages than local firms, foreign subsidiaries can avoid spillovers making workers’ mobility from foreign to local firms more difficult, and, besides, they can hire the best workers, meaning that local firms must hire the less productive workers (Globerman et al., 1994).
● By competing with local firms, specially if the foreign affiliate is geared to domestic market, MNEs may reduce the market share for local firms (OECD, 2002).
● To take advantage of spillovers, there must be a relative (low tech-nology gap between foreign and local firms) or absolute (enough education level or human capital) absorption capacity in the host country (Graham, 2000).
Potential positive spillovers can also be vertical ones: through backward and forward linkages with local suppliers and customers, foreign affiliates may generate productivity spillovers (Rodríguez, 1996). These spillovers more easily occur when local firms do not compete with foreign firms, and it may be in the interest of both parties to collaborate. The channels through which these positive vertical spillovers take place are the following ones:
● Suppliers may increase production scale, thanks to the demand from the affiliate firm.
● Suppliers may be induced by foreign affiliates to a technology upgrading by training, quality requirements, technical specifications, and so on.
● Other local enterprises may benefit from better and cheaper inputs supplied by local and/or foreign firms.
● In the case of final products, customers and distributors may benefit from marketing and other knowledge of the MNE. In the case of intermediate products, customers may benefit from better and cheaper intermediate products.
In sum, vertical spillovers depend on the number, kind and quality of the linkages with local firms, and this, in turn, depends on the local content, which is determined by the size of the local market, the intensity of inter-mediate consumption of the MNEs’ production processes,3the technical capabilities of local enterprises, the MNEs’ sourcing policies, the local content regulation, and the time horizon (OECD, 2002; UNCTAD, 2001).4