DE ACUERDO MEDIANAMENTE DE ACUERDO DESACUERDO EN APLICA NO

4. AN EMPIRICAL SURVEY OF THE SPILLOVERS

the growth of productivity of local firms, and, therefore, the smaller the productivity gap. In sum, the spillovers generated by multinational enter-prises would lead to a process of convergence of productivity between foreign and local firms.

To test this hypothesis of productivity convergence we use the following model proposed by Blomstrom and Wolf (1994):

PC_ishows the percentage change of the productivity ratio between foreign and local firms in the unit ianalysed (industry or economy).GAPmeasures the ratio of productivity between foreign and local firms at the beginning of the period analysed.FSis the share of foreign firms in the value added.

This share is measured as the average share for the period analysed. Finally, FSGrrepresents the growth during the period of the share of foreign firms in value added.

If we take for granted that foreign firms have higher productivity than local firms, the productivity ratio between foreign and local firms is higher than 1. Therefore, a positive sign of PC_imeans a divergence of productiv-ity, that is, productivity in foreign firms grows faster than in local firms. On the contrary, a negative sign of PC_imeans a convergence of productivity, that is, productivity in local firms grows faster than in foreign firms.

Productivity of foreign and local firms diverge if the sign of the coefficients 2,3and 4is positive. Conversely, productivity of foreign and local firms converge if the sign of the coefficients 2,3and 4is negative.

The economic interpretation of the coefficients is the following one. If2is positive, it means that the greater the productivity gap at the beginning of the period, the greater that gap will be in the future. The higher effi ciency-productivity of foreign firms leads to a process of cumulative causation and to a reinforcement of their competitive advantages. That behaviour is asso-ciated with the difficulties of local firms in absorbing the technological and knowledge advantages enjoyed by multinational corporations and their foreign affiliates. A positive sign of 2would mean the incapacity of local firms to absorb the potential spillovers from foreign affiliates. On the con-trary, a negative sign of 2means a convergence in productivity between foreign and local firms. The greater the productivity gap, the higher the incentives for local firms to fully absorb the spillovers generated by the pres-ence and working of foreign affiliates, and the faster the pace of rising pro-ductivity of local firms.

In the cases of the variables FSand FSGr, if 3and 4are positive, it means that the greater the presence of multinational enterprises, the greater the productivity gap (divergence) will be between foreign and local firms.

PC_{i 1 2}GAP_{i 3}FS_{i 4}FSGr_i

This divergence is interpreted in the sense that foreign subsidiaries are crowding out local firms by making the latter less competitive, since their productivity will be lower. In other words, foreign subsidiaries generate negative spillovers.

We must keep in mind that we are not actually measuring spillovers, that is, whether FDI increases the productivity of local firms or not. When we talk of ‘positive’ (‘negative’), we mean that productivity growth of local firms is higher (lower) than that of foreign affiliates. We identified produc-tivity with competitiveness, and what we mean is that the presence of foreign firms can improve the competitiveness of local firms by making them more similar to the former (positive spillovers) or that, on the contrary, the presence of foreign firms can worsen the competitiveness of local firms by increasing the productivity gap with the former (negative spillovers).

In sum, the model proposes that the evolution of the productivity gap between foreign and local firms is related to the size of the productivity gap and to the size of foreign firms in the local economy. In this sense, the sign and size of spillover effects are determined by the above elements.

To test this hypothesis and model, we use the data from the OECD data-base ‘Measuring Globalisation: The Role of Multinationals in OECD Economies’. With the data included in the database, we have calculated the share of foreign firms in total value added and the productivity (value added for employee) of local and foreign firms. These data have been cal-culated at a national level, and within a country at an industry level (classification ISIC Rev.3). Though the database includes data for 21 coun-tries, our analysis is made on the basis of only 12 countries due to lack of data on the rest. Besides, we have focused our analysis on the manufactur-ing sector because of its higher industry disaggregation.

Table 10.1 shows the basic outcomes of the analysis of the productivity of local and foreign firms. The data corroborate one of the basic assump-tions of the theory of FDI and international production: in all cases, with the sole exception of Finland, the productivity of foreign subsidiaries is higher than that of local firms and, therefore, it could be stated that foreign firms are more competitive than local firms. However, the size of the pro-ductivity gap varies among countries. Countries like Finland, France and Sweden have low productivity gaps, indicating a high level of productivity for local firms. On the contrary, countries like Hungary, Ireland, Portugal or Turkey have very high gaps: in these countries the productivity gap is well above 2. The evolution of the productivity gap is not homogenous: the pro-ductivity gap rises in eight countries but it falls in four economies (France, the Netherlands, Sweden and the United Kingdom). In all cases, productivity rises in both foreign and local firms, and, therefore, the

Table 10.1 Productivity of foreign and local firms in the manufacturing sector (millions of local currency units) and participation of foreign firms in total value added (%)

Foreign firms Local firms Foreign Share Productivity

(1) (2) (%) Gap (1/2)

Czech Rep.

1997 0.467 0.2774 16.8 1.685

1999 0.533 0.3008 25.5 1.770

Finland

1995 0.319 0.3193 9.7 1.000

1999 0.371 0.3682 16.0 1.008

Netherlands

1995 0.167 0.1117 27.3 1.493

1998 0.201 0.1397 28.7 1.436

Ireland

1991 0.076 0.0277 68.4 2.744

1998 0.188 0.0376 81.9 5.011

Portugal

1996 0.032 0.0172 13.6 1.831

1999 0.034 0.0154 31.5 2.195

Turkey

1992 584 251 10.7 2.327

1998 21,555 8,471 12.9 2.545

France

1993 0.357 0.2844 28.7 1.254

1998 0.395 0.3349 31.2 1.178

Hungary

1993 1.034 0.667 40.6 1.550

1999 4.203 1.536 70.4 2.737

Japan

1994 9.473 7.5629 1.0 1.253

1996 12.176 8.0848 1.2 1.506

Norway

1991 0.370 0.3305 8.1 1.120

1998 0.667 0.4059 25.7 1.642

Sweden

1990 0.341 0.3087 14.8 1.105

1998 0.571 0.5261 21.1 1.086

UK

1995 0.059 0.0323 25.7 1.811

1998 0.048 0.0369 32.9 1.306

Source: Our calculations.

evolution of the productivity gap is explained by the different paces of growth of productivity in foreign and local firms. The exceptions to this rule are the UK for foreign firms, and Portugal for local firms. In the British case, the sharp fall in the productivity gap is mainly related to a fall in the pro-ductivity of foreign firms, but in the Portuguese case, the increase in the pro-ductivity gap is mainly explained by the fall of propro-ductivity of local firms.

In relation to the behaviour of the foreign share in total value added, this share has increased in all the countries. However, this common trend con-ceals a big disparity. In countries like Japan, Turkey and Finland, the share of foreign firms in the manufacturing value added is below 20 per cent. By contrast, countries like Hungary or Ireland have shares above 70 per cent.

As mentioned, our objective is to test the hypothesis that the evolution of the productivity gap between foreign and local firms is explained by the spillover effects from FDI, where the size and sign of these spillovers are related to the initial size of the productivity gap and the size and evolution of the presence in the local economy of foreign subsidiaries. With this aim, we have developed a cross-country regression at the whole manufacturing sector level, using an OLS method. With this analysis, therefore, we are testing the existence of interindustry spillovers.

Table 10.2 shows the outcome of this regression. In opposition to the

‘optimistic’ view, all the variables have the opposite sign than would be expected in the spillovers mainstream literature.GAPand FSseem to play no role in the evolution of the productivity gap. However, both variables have a positive sign. Therefore, the greater the productivity gap and the greater the presence of foreign firms at the beginning of the analysed Table 10.2 Determinants of dependent variable convergence for the

manufacturing sector

Constant 0.285

(1.114)^a

GAP 0.093

(0.521)

FS 0.004

(0.812)

FSGr 0.021*

(2.040)

R²adjusted 0.476

F 4.324**

N 12

Notes: ^at-values in parenthesis. * significant at 10%, ** significant at 5%.

period, the greater will be the productivity gap between foreign and local firms.

The only significant variable is the growth of the foreign share in total manu-facturing value added (FSGr). The coefficient has a positive sign: the higher the growth of foreignfirms’ share, the greater the productivity divergence between both types offirms. As we saw in Table 10.1, foreignfirms have incre-ased their share in manufacturing value added in all the countries, the (rela-tive) productivity-competitiveness of localfirms has fallen in all the analysed economies. In sum, FDI, in general, increases the productivity gaps irrespec-tive of the initial productivity gap. Therefore, FDI presence is not generating inter-industry spillovers big enough to reduce the productivity gaps.

However, this conclussion suffers from the high level of aggregation of our analysis, since we are focusing on the whole manufacturing sector. On the one hand, foreign firms may be investing in high productivity activities (industries or phases of the value added chain) whilst local firms would be investing in low productivity activities. On the other hand, since we focus on whole manufacturing sectors, the outcomes could be different with a higher sectorial disagreggation. To check this possibility, we have pro-ceeded with the same model but with a higher disaggregation, analysing the evolution of the productivity gap for nine manufacturing industries. We have applied an OLS cross-country analysis for manufacturing industries, thus checking the existence of intraindustry spillovers. The results for the nine industries are shown in Table 10.3.

As Table 10.3 shows, the model is only relevant for four industries: food, beverages and tobacco; wood and paper; basic and fabricated metal prod-ucts; and total machinery and equipment. Focusing on the determinant variables of the evolution of the productivity gap, the share of foreign firms (FS) in the industry value added is significant in only one industry (total machinery and equipment), and with a positive sign (the presence of foreign subsidiaries involves a higher divergence in productivity between foreign and local firms). In the case of the initial productivity gap (GAP), it is only significant in one industry (basic and fabricated metal products), and with a negative sign (the initial productivity gap is associated with higher productivity gaps at the end of the period). The only relevant vari-able would be the growth of the foreign share in value added. This varivari-able is significant in four of the nine industries (food, beverages and tobacco, wood and paper, basic and fabricated metal products, and total machinery and equipment). In three out of these four industries, the sign of the coefficient is positive (food, beverages and tobacco, basic and fabricated metal products, and total machinery and equipment), and, therefore, the increase in the share of foreign firms in value added leads to a higher divergence of productivity between foreign and local firms. This outcome

is associated with the existence of negative spillovers. Only in the case of wood and paper is the sign of the coefficient negative, and, therefore, the productivity gap falls (positive spillovers).

From the industry perspective, in two industries (food, beverages and tobacco, and total machinery and equipment) FDI is associated with higher productivity gaps between foreign and local firms. In one case (wood and paper), by contrast, FDI is associated with lower productivity gaps between foreign and local firms. And in one case (basic and fabricated metal products) the result is indeterminate, since the initial productivity gap leads to lower future productivity gaps, but the growth of the foreign share in value added leads to a higher productivity gap. In the other five indus-tries, the outcomes are not significant.

In sum, it seems clear that the analysis seems to conclude that there does not exist any generalized outcome about the existence and sign of the spillover effect. If anything, it could be concluded that the outcomes would be negative and that FDI reinforces the differences in productivity between foreign and local firms. However, there exist some caveats in this prelimi-nary conclusion. The first one is the existence of a low number of observa-tions due to poor data availability for both countries and industries. The Table 10.3 Determinants of dependent variable convergence for

manufacturing industries

INDUSTRY Constant GAP FS FSGr R² F N

adjusted

Food, beverages 0.015 0.016 0.003 0.161* 0.765 8.597** 8

and tobacco

Textiles 0.258 0.125 0.001 0.003 0.014 0.023 9

Wood and paper 0.081 0.0156 0.006 0.127*** 0.478 3.444*** 9 Chemical products 205.047 199.567 2.666 95.155 0.265 1.722 7

Non-metalic 0.252*** 0.022 0.004 0.161 0.265 1.960 9

mineral products

Basic & fabricated 0.079 0.167*** 0.005 0.465*** 0.668 6.364** 9 metal products

Total machinery 0.241** 0.001 0.005*** 0.384* 0.985 112.635* 6

& equipment

Medical, precission 3.095 4.715 0.073 2.666 0.099 0.790 8

& optical instruments

Transport 0.812 0.448 0.011 0.118 0.046 0.911 7

equipment

Notes: * significant at 1%, ** significant at 5%, *** significant at 10%.

second caveat is related to a specification problem of our model. The model does not focus on productivity levels, as proxied by labour productivity, but, actually, on productivity convergence, that is, on the relative growth of productivity levels for foreign and local firms.