Working Paper: CEPR ID: DP7866
Authors: Juan Carluccio; Thibault Fally
Abstract: Does foreign entry improve host country productivity and welfare? Existing studies have focused on the role of technology spillovers and backward linkages with domestic suppliers. In this paper, we study how these externalities are affected by technological incompatibilities between foreign and domestic technologies. When foreign technologies require specialized inputs, some local suppliers self-select into production for multinational firms. A decrease in the cost of inputs compatible with the foreign technology has heterogeneous effects. It benefits foreign firms and the most productive downstream domestic firms adopting the foreign technology, and negatively affects firms using the domestic technology. The impact on welfare is positive when we allow for endogenous entry in both upstream and downstream industries, but welfare gains can be negatively related to observed foreign presence at equilibrium. Our model can also reproduce various stylized facts drawn from the empirical literature on vertical and horizontal FDI spillovers.
Keywords: multinational firms; technological incompatibilities; pecuniary externalities; host country welfare
JEL Codes: F23; O14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign entry (F23) | average productivity of local suppliers (L69) |
| foreign technology adoption (O33) | productivity of domestic firms (D22) |
| costs of adopting foreign technology (L24) | productivity of domestic firms (D22) |
| foreign technology adoption (O33) | productivity of domestic firms using domestic technology (O49) |
| foreign entry (F23) | welfare of host economy (D69) |
| entry costs decrease (L11) | welfare of host economy (D69) |
| technology adoption costs decrease (O00) | welfare of host economy (D69) |
| foreign entry (F23) | productivity gains from exit of less productive firms (D21) |
| foreign entry (F23) | introduction of new varieties by foreign firms (F23) |
| foreign presence (F54) | productivity of domestic firms (D22) |