Host Country of Foreign Investment

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NBER WORKING PAPERS SERIES

HOST COUNTRY BENEFITS OF FOREIGN INVESTMENT

Magnus BlomstrOrn

Working Paper No. 3615

NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 1991

This paper is part of NBER's research program in International Studies. Any opinions expressed are those of the author and not those of the National Bureau of Economic Research.

NBER Working Paper #3615 February 1991 HOST COUNTRY BENEFITS OF FOREIGN INVESTMENT

ABSTRACT

This

paper reviews the empirical evidence on the very

different conclusions that can be drawn about productivity

spillovers of foreign direct investment. It explains the concept of host country spillover benefits, describes the various forms these benefits can take, both within and between industries, and summarizes the evidence regarding the relative magnitudes of the

various forms of spillovers. Moreover, the paper discusses host country policy measures which can accelerate both the BC affiliates' technology imports and the diffusion of their
technology in the host economies.

Magnus BlomstrOm Stockholm School of Economics P.O. Box 6501 113 83 Stockholm, SWEDEN

HOST COUNTRY BENEFITS OF FOREIGN INVESTMENT*

Magnus Blomström

1. Introduction
The possibility of getting access to modern technology is

perhaps the most important reason why countries wish to attract

foreign investment. By inviting multinational corporations
(MNC5), host countries may get access to technologies that they

cannot produce by themselves. Foreign direct investment can also lead to indirect productivity gains for host country firms

through the realization of external economies. Generally these benefits are referred to as "spillovers", which indicates the importance of the way in which the influence is transmitted.

There are several ways in which technology spillovers may

occur. Multinational firms may, for instance, increase the
degree of competition in host—country markets and in that way force existing inefficient firms to make themselves more

productive by investing in physical or human capital. MNCs may also provide training of labor and management which may then

become available to the economy in general. Another possible channel for spillovers is the training of local suppliers of

*1 am grateful to An Kokko, Robert Lipsey, and Don McFetridge for comments on an earlier draft of this paper, and to Investment Canada for financial support.

intermediate products to meet the higher standards of quality control, reliability, and speed of delivery required by the technology and method of operation of the foreign-owned company. The purpose of this paper is to discuss the very different conclusions that can be drawn about productivity spillovers from

foreign investment. Since the technology transferred abroad by multinationals constitutes the potential for spillovers to local firms, the paper begins by considering MNCS as carriers of

technology and examining the determinants of their technology

transfer activities. Second, it explains the concept of host country spillover benefits, describes the various forms these benefits can take, both within and between industries, and summarizes the evidence regarding the relative magnitudes of the

various forms of spillovers. Third, the paper discusses host country policy measures which can accelerate both the MNC affiliates' technology imports and the diffusion of their

technology in the host economies. Finally, Section 5 summarizes and concludes the paper.

2. International Technology Transfer and the MNC
The attention given to the role of multinationals in the
international transfers of technology is not surprising, for at

least two reasons. First, multinational corporations undertake a major part of the world's research and development efforts and produce, own, and control most of the advanced production

technology. R&D is crucial for...
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