Do domestic firms benefit from foreign direct investment? Evidence from panel data

Abstract

Many developing countries now actively solicit foreign investment, offering firms subsidies, tax holidays, and exemptions from import duties. One justification for subsidizing these firms is the so-called spillover of technology from foreign to domestic firms. Using panel data -- following more than 4, 000 Venezuelan firms from 1975 through 1989 -- The authors explore two aspects of the effect of foreign direct investment. First, they examine the relative performance to joint ventures and domestic firms. They find that increases in foreign equity participation are strongly correlated with increases in plant productivity. Second, they measure the impact of joint ventures and foreign subsidiaries on plants with no foreign investment. Facing fewer data limitations than in previous studies, they find that foreign investment negatively affects the productivity of domestically owned plants. These results suggest that whatever technology gains occur through foreign investment are captured entirely by joint ventures.

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