November 2003

IZA DP No. 944: Much Ado About Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?

published in: World Bank Research Observer, 2004, 19(2), 171-197

Governments the world over offer significant inducements to attract inward investment, motivated by the expectation of spillover benefits to augment the primary benefits of a boost to national income from new investment. This paper begins by reviewing possible sources of FDI induced spillovers. It then provides a comprehensive evaluation of the empirical evidence on productivity, wages and exports spillovers in developing, developed and transitional economies. Although theory can identify a range of possible spillover channels, robust empirical support for positive spillovers is, at best, mixed. The reasons for this are explored and the paper concludes with a review of policy aspects.