The Effects of Inward FDI

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The intent of the study by Haskel, Pereira, & Slaughter (2007) was to shed light on whether there are spill-over emanating from Foreign Direct Investment (FDI), and the willingness by host nations to offer payment in order to attract more FDI. The need to address the issues raised is vital given the fact that policy makers and the general public need answers. Amid these requirements, there are limited empirical studies that have been dedicated to this area. As such, the authors had to carry out the research. In the study, the productivity of domestic firms was correlated with the existence of FDI given that Haddad & Harrison (1993) found out that in Morocco, there was positive correlation between increased industry level of FDI with lower productivity of local firms (cited in Haskel, Pereira, & Slaughter, 2007). On the other hand, the authors cite a case in Venezuela in which a negative spillovers correlation existed in manufacturing firms because of intense competition.

The variability of results on the relationship between spillovers on FDI and the need to attract more FDI require empirical research to unravel the state in the UK. In their methodology, the authors begin by reviewing current literature on spillovers of multinational corporations, (MNCs) and relevant theories that apply on the subject. In the review they assess the behaviour of MNCs and the possible avenues of spillovers, which they blend with theories that have been developed on the same field. This gives credentials to their basis of addressing limitations of other studies or new areas that no research has been dedicated to in order to give new insight.

The authors then search fro data from other literature that pertain to calculation of productivity and the impact of foreign firms. Their main data source was Annual Census Production, (ARD), which is the official body that collects, and stores information on any firm in the UK. Other source of data used included the Office of National Statistics, (ONS). The data covered the period of interest, 1992, in which the FDI experienced an inflow in the UK. The author used a specified set of functions to work out production followed up by measurement of gross output. With the models developed, the researchers are able to answer specific questions that are not only beneficial to the government departments but also to foreign firms. They also came up with a mechanism to answer the question; how much should the government pay to attract FDI?

They conclude that most economies pay subsidies in order to attract FDI. In order to justify this claim, Haskel, Pereira, & Slaughter (2007) buttress that social returns are more effective than private returns in FDI since spillovers accrue to domestic firms due to high level of productivity. They found out a positive correlation between Total Factor Productivity, (TFP), and employment sharing with foreign firms in specific industries. In addition, “Our estimates suggest that the per-job value of spillovers are less than per-job incentives governments have granted in recent high-profile cases, often several times” (Haskel, Pereira, & Slaughter, 2007, p. 494).

Other studies are case studies and industry studies. As for cases, Moran (2001) for example discovered positive correlation of spillovers to host countries from FDI in electronics, machinery, and transportation industries. However, case studies do not always offer quantitative information and cannot be used for a generalised assumption. Industry-level studies (for example, Caves, 1974; Blomstrom, 1986; and Driffield, 2000) have documented a positive industry level correlation between FDI inflows and productivity. This could be due to spillovers. Nevertheless, it may also be batting-average effects if inward FDI forces the exit of low-productivity domestic plants or raises the market share of the more productive foreign firms. Alternatively, it may be that multinationals tend to concentrate in high productivity industries. These studies concur with the finding of Haskel, Pereira, & Slaughter (2007) and as such, make their study relevant. Even though the variables used differ, the overall effect of how spillovers from FDI can either benefit or compromise the stakes of FDI in local production.

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