This paper examines whether foreign direct investment (FDI) has spillover effects on the productivity of domestic firms. Three types of potential spillovers are considered: horizontal (within industry), backward (foreign-owned customers) and forward (foreign-owned suppliers).
The study uses data on a 10-year panel of firms and covers almost all business sectors in the New Zealand economy from 2000 to 2010. Panel methods are used to control for firm heterogeneity and the endogeneity of FDI. Separate estimates are obtained by industry group and by firm size. We find little evidence of substantial positive spillover effects from FDI to local firms’ productivity.
The presence of foreign-owned customers lifts productivity among small domestic firms and those in the primary sector, though the effects are small.