IDE Research Columns

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2022

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The Need for an Integrated Approach to Foreign Direct Investment and Global Value Chains

Published on 2022/4/22 No.05

This column attempts to summarize the main arguments of Murakami and Otsuka (2020) to elucidate the need to integrate the quantitative approach of foreign direct investment (FDI) studies with insightful but descriptive studies of global value chains. Defects of FDI StudiesI believe that nothing is more problematic than empirical studies of the impact of FDI on the development of local industries in developing countries. Although the issue is of utmost practical importance, there are at least two major defects in most existing studies. As discussed by Murakami and Otsuka (2020), those studies statistically analyze the productivity effects of FDI on local firms i. Researchers commonly assume, without testing, that the presence of foreign firms enhances the productivity of local firms, because of the spillover effect of the advanced knowledge of production from foreign firms. The spillover effect is the external effect, which is assumed to affect the level of productivity without conscious transaction of knowledge. Visual inspections of improved products manufactured by foreign firms, learning by reverse engineering of such products, and stealing ideas by poaching workers from foreign firms are examples of the spillover effects. The following questions arise: (1) Does the common statistical analysis make sense? and (2) Is the spillover effect really important?