Abstract:
This paper analyzes the relationship between R&D and capital investment by domestic firms and productivity of foreign affiliates of multinational enterprises in developed countries. We build on the concepts of ‘reverse’ knowledge spillovers from domestic to foreign firms rather than the more extensively studied spillovers from foreign to local firms. Using ideas from the theoretical literature on the reciprocity of knowledge diffusion, we explain why these understudied reverse spillovers might differ when R&D and capital are considered as two separate channels. Using industry-level data for six OECD economies (the Czech Republic, Italy, Japan, Norway, Slovakia and the United States) in 2001-2007, we find robust support that R&D investment by local firms is positively associated with productivity of affiliates of foreign firms. A ten percent increase in R&D investments by domestic firms is associated with an increase of productivity of foreign firms by about 3%. The support for the hypothesis that the capital investment by local firms has a negative effect on MNE affiliate productivity in the same industry is weaker. We discuss alternative specifications using fixed effects, lagged output and total factor productivity estimates and interpret heterogeneity of results across countries. Most notably, we offer some preliminary insights and directions for further research into why the reverse spillovers seem to occur in the (former) transition economies of Slovakia and the Czech Republic. Our findings and theory improve on the scant existing scholarship on reverse spillovers and contributes to the literature on FDI motivation and productivity spillovers from and to knowledge-seeking FDI. We also build on the recent theoretical improvements in the literature that offer a more socialized account of FDI spillovers and apply these conceptual innovations to the phenomenon of reverse spillovers.