Effects of Outsourcing and FDI Spillovers on Productivity of East Asia-Pacific Countries

Outsourcing and foreign direct investment (FDI) have become widespread phenomena of globalization in recent decades. They not only bring in capital but also introduce advanced technology that can improve the factor productivity of the host country firms, thereby generating economic growth. More importantly, the technological benefit is not limited to locally affiliated firms but can also spread to non-affiliated ones. This paper develops theoretical relationships between outsourcing, FDI spillovers and productivity, and then examines empirically whether international outsourcing contributes to technological spillovers through which total factor productivity increases in a sample of East Asia-Pacific countries. A panel-based model is specified to allow for the link between FDI, outsourcing and productivity of the region’s countries during 1990-2004. The estimation results show that international outsourcing and FDI spillovers have had significant and expected effects on total factor productivity (TFP) of the Asia-Pacific countries. This can be a good lesson for Iran to promote its economic relations with the world, particularly with those countries investigated here, as they have adequate potentials in case.