Foreign Investment And Its Effect On The Economic Growth Of Host Countries

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As we discuss in the second chapter, inward foreign investment is believed to boost the economic growth of host countries directly through employment creation and capital formation, and indirectly through knowledge, technology, and information spillovers. Multinationals have superior technologies, technical know-how, and managerial and marketing experiences than domestic firms. Similarly, exporting firms, domestic or foreign, have advantages over non-exporting firms regarding access to advanced technologies that are more productive and efficient. However, multinationals and exporters may not fully internalize the benefits of these assets. The benefits may spillover to domestic and non-exporting firms through market interactions,…show more content…
Unlike the spillovers from foreign investment, there are a handful of studies regarding spillovers from exporting firms, particularly local exporting enterprises. The access to advanced technologies and well informed foreign clients compel exporters to improve their efficiency, marketing strategy, and product quality. Their knowledge of new technologies and products, as well as information on international markets and clients, may spillover to improve the productivity of local non-exporting enterprises. Exporters are also likely to create a more competitive environment in local markets that will create pressure on the non-exporting firms to improve their performance so as to stay in business and maintain their market share. A study by cite{alvarez} shows positive productivity spillovers from domestic and foreign-owned exporting firms to their local suppliers in upstream sectors (backward spillover). Similarly, cite{girma8} suggests that horizontal spillovers arise from the export-oriented foreign firms, while the domestic-market oriented firms produce backward spillovers. Besides, cite{wei} finds a positive inter-industry but negative intra-industry spillovers from export activities in China 's manufacturing industry. According to the micro (firm-level) literature on productivity, there are three sources of total factor productivity (TFP) growth: technical progress, technical efficiency
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