Productivity Spillovers to Domestic Plants from Foreign Direct Investment: Evidence from UK Manufacturing, 1974-1995

Empirical literature on the impact of FDI has considered at length the indirect spillover benefits that accrue to domestic plants as a result of FDI presence. However, the imprecise and disparate nature of spillovers makes accurate definition and indeed measurement of them difficult to achieve. In this paper, we consider the definition of what constitutes a spillover from FDI, and setout three main channels for spillovers; within (intra)industry, between (inter)industry and agglomeration. We then go on to measure the indirect impact of FDI on the total factor productivity of domestic plants in a number of UK manufacturing industries, 1974-1995, using a standard production function-based approach. We use data made available from the UK ARD and information derived from UK input-output tables, to establish the potential for inter-industry linkages. Our results indicate that the competition and ëabsorption capacityí effect at times outweighs any potential benefits, leading to negative spillovers. We also find that inter-industry spillovers are generally more prevalent than intra-industry spillovers. Generally, we do not find the agglomeration spillover to be significant. However, we conclude that the nature of spillovers is such that measurement techniques traditionally adopted fail to adequately explain their complex and diverse nature.