Foreign direct investment and technology spillovers in low and middle-income countries: A comparative cross-sectoral analysis

In this paper we analyse the trends in Foreign Direct Investment (FDI) flows worldwide across sectors and across value-chain activities, with a particular focus on low- and middle-income countries in comparison with advanced countries. We begin by discussing the growing fragmentation of global production and the opportunities this presents to today's developing countries for benefiting from FDI. Our review of the literature on knowledge spillovers via FDI indicates that spillovers typically occur along the value chain, from foreign firms to their local suppliers or clients but not to their competitors, and that tapping into the technological resources of foreign firms is not an automatic process but hinges on a few host-economy characteristics. Our analysis of worldwide FDI flows during 2008-2013 indicates the growing importance of countries outside the traditional industrialised world, accounting for nearly half of inward greenfield FDI projects. While FDI flows into industrialised economies and emerging industrial economies take place mainly in high- or medium-tech manufacturing, other developing countries and least developed countries tend to attract FDI in medium- and low-tech manufacturing. When we examine FDI flows across value-chain activities, we find that emerging economies are attracting increasingly more knowledge-based FDI, with China and India hosting the highest number of FDI projects in innovation activities. Finally, our analysis suggests that - especially in the manufacturing sector - Multinational Enterprises (MNEs) tend to invest more in countries where domestic technological efforts are higher, pointing to the importance of indigenous technological capacities in attracting FDI in the first place, but also in ensuring that these investments generate knowledge spillovers that are crucial for technological catching up by developing countries.