Technology from Foreign Direct Investment and Welfare Gains through the Supply Chain.

SCM 05

Garrick Blalock † Paul J. Gertler ‡

January 9, 2004

Abstract

We measure the diffusion of technology brought with foreign direct investment (FDI) and the effect of that technology on competition and welfare in the host economy. Using a panel dataset of Indonesian manufacturing establishmentsfrom1988to1996, we measure the effect of FDI in downstream markets on local firm productivity in upstream markets and find strong evidence that vertical supply chains are a channel for technology transfer.

In contrast, prior studies measuring the horizontal spillover of technology from foreign entrants to domestic competitors find mixed evidence of technology transfer.

Our finding is likely explained by the incentives of multinational enterprises: whereas they attempt to minimize technology leakage to competitors, they often deliberately transfer technology to suppliers with the aim of reducing prices and increasing competition in upstream markets. Indeed, we find that downstream FDI induces greater competition and lower prices, as well as higher output and valued added, in upstream supply markets.

Further, these benefits also flow to other sectors procuring from those supply markets.