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Social structure and technology spillovers from foreign to domestic firms

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Abstract

Do domestic firms benefit from the presence of foreign multinational firms? The FDI spillovers literature addresses this very issue, primarily examining whether the presence of foreign firms in a host market leads to technology spillovers and upgrading in domestic firms. A key finding is that spillovers depend on the absorptive capacity of the domestic firm. Yet, in conceptualizing absorptive capacity, scholars have largely overlooked how social structure shapes it. Integrating insights from social networks, technology upgrading, and innovation literatures, I emphasize that a domestic firm's ability to absorb spillovers depends on the social structure it is embedded in. I argue that ties with foreign firms reduce the constraints that domestic firms usually face in searching for and transferring in foreign technologies. However, while search benefits from sparse network structures, transfer is facilitated by cohesive ones. Also, while affect-based ties might motivate foreign firms sufficiently to share information with domestic firms at the search stage, reciprocal benefits and social monitoring conferred by common third-party ties are necessary in the transfer stage. Any effect of ties also depends on the routine repertoire of domestic firms. Put together, these arguments offer a more socialized account of the spillover process.

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Notes

  1. In this paper, I use the terms “technology spillovers,” “productivity spillovers,” and “FDI spillovers” interchangeably, and to mean the same thing: spillovers of technology know-how from foreign to domestic firms in the host country.

  2. I thank an anonymous reviewer for pointing out that the autonomy of the MNE subsidiary is also an important precondition for spillovers. A tightly controlled subsidiary may not have the discretion to share knowledge with domestic firms. But, at the same time, autonomy without incentives is not helpful. An autonomous subsidiary will not share knowledge unless there are sufficient incentives or motivating factors. I build on this point in the lead up to Proposition 4.

  3. An early precursor to this idea is Hirschman's (1958) theory of unbalanced growth. Hirschman challenged the concept of “balanced economic growth” prevalent at the time, and argued that because of the linkages between sectors, the planned development of only some of them – that is, unbalanced growth – would automatically stimulate latent entrepreneurial activity in related sectors. A rise in demand and price in one sector would therefore stimulate latent entrepreneurship in sectors that supplied complementary products. Linkages could also take the form of direct relationships between firms in vertically related industries, with foreign firms providing technical and managerial support to bring domestic suppliers up to speed (Lall, 1980). While these are in effect formal transfers to domestic suppliers, Markusen and Venebles (1999) and Rodriguez-Clare (1996) extend the argument to include indirect effects. That is, as foreign firms establish backward linkages that build and strengthen supply industries, this in turn benefits other domestic firms in downstream sectors that source intermediates from these industries.

  4. I thank an anonymous reviewer for raising this point.

  5. Data requirements are obviously more demanding. First, I would need to move away from the large-scale multi-industry data approach in conventional spillovers studies to single-industry or geographically contained studies, so that data collection is more tractable. Second, missing data become a more important concern (Borgatti, Carley, & Krackhardt, 2006), because “each missing case removes the N−1 possible relationships with other network actors” (Ingram & Roberts, 2000: 399). Common method bias can also be a problem if the dependent variable is collected from the same survey. Yet I do not see these as significant hindrances, but rather as issues of which scholars need to be aware and careful (McDermott & Corredoira, 2010). Some scholars have handled common method bias by collecting data on dependent and independent variables from sequential surveys of the same respondents (Tsai, 2002).

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Acknowledgements

I thank Anand Swaminathan and three anonymous reviewers, Arjen Slangen, Chinmay Pattnaik, Rekha Krishnan, Roger Smeets, and Vikas Kumar for their helpful comments on this paper.

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    Alex Eapen

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Accepted by Anand Swaminathan, Area Editor, 19 December 2011. This paper has been with the author for three revisions.

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Eapen, A. Social structure and technology spillovers from foreign to domestic firms. J Int Bus Stud 43, 244–263 (2012). https://doi.org/10.1057/jibs.2012.2

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