Embodied and Disembodied Spillovers from FDI: Sectoral Evidence from Ireland

Abstract

Using a distinctive sectoral dataset from Ireland, among the most attractive destinations of Foreign Direct Investment (FDI), over the period 2000 and 2018, we evaluate the role of embodied and disembodied spillovers in labour productivity. The paper fills substantial gaps in the literature of FDI led productivity gains. First, we examine how (embodied) spillovers from different sourcing strategies of MNEs (material versus service linkages) affect the trajectory of sectoral productivity. Second, we evaluate the role of (disembodied) spillovers emerging from the intensity of foreign royalties and employee training. Third, we account in a relative manner for the absorptive capacity of domestic sectors, as a prerequisite for facilitating knowledge spillovers. Instead of purely measuring the level of human capital in the sector, we use the educational gap between domestic firms and Multi-national Enterprises (MNEs) in the same sector. After incorporating these new elements, the analysis shows that embodied spillovers through the material linkage are positively associated with domestic labour productivity (LP), nonetheless gains vary substantially across segments of the productivity distribution. The service linkage impacts negatively unless sectors get close to the educational frontier. Our results are robust for selectivity bias offering ample space for policy design and intervention.

Appendices

Appendix A: Descriptive Evidence

Fig. 4

Average labour productivity (in logs) of 26 Sectors, 2000-2018. See the text for further details. Source: Authors’ calculation

Fig. 5

The CDF plot of log labour productivity. Notes: This graph plots the CDF of log labour productivity. Source: Authors’ calculation

Table 3 Average FDI Net Inflows, Stock of FDI, and FDI Net Inflows to GDP 2006-2017

Table 4 Foreign output, materials, and services source in Ireland

Fig. 6

Costs on royalties, exports, payroll, and formal training 2000-2018. Notes: Gray bar chart for Irish domestic owned firms sectors. Source: Authors’ calculation

Appendix B: Definition of Variables

This section provides information about the additional variables used in Tables 1 and 2. The controls capture foreign competition from the agglomeration of economic activity within the same industry ($Foreign_{jt}$), export intensity of MNEs ($Export_{jt}$), and price–cost margins ($PM_{jt}$).

Foreign competition is defined as the share of total sales of MNEs over the total sales of all firms in the same sector, defined as:

$$\begin{aligned} Foreign_{jt} = FS_{jt}/TS_{jt} \end{aligned}$$

(B1)

where $FS_{jt}$ represents the total sales of all MNEs in sector j at time t, and $TS_{jt}$ represents the total sales of all firms in sector j. This measure represents the.

The second measure captures the spillover effect from MNEs export intensity. The export-orientation of MNEs induces learning effects that can potentially benefit productivity of domestic sectors. The variable is defined as:

$$\begin{aligned} Export_{jt} = FE_{jt}/TE_{jt} \end{aligned}$$

(B2)

where $FE_{jt}$ is the total exports in manufacturing and international traded services of all foreign-owned firms in sector j at time t, hence $Export_{jt}$ captures the foreign export intensity.

The third variable captures the relationship between sectoral productivity and market conduct. We need to isolate the competition effects from potential FDI spillovers. We construct a measure of price–cost margins, following Siotis (2003) and Sembenelli and Siotis (2008) as:

$$\begin{aligned} PM_{jt} = \frac{ValueAdded_{jt} - Payroll_{jt}}{Value\_added_{jt}+NetCostsMaterials_{jt}} \end{aligned}$$

(B3)

where $ValueAdded_{jt}$ refers to the total value added of MNEs in sector j at time t, $Payroll_{jt}$ represents the total payroll cost of MNEs in sector j at time t, $NetCostsMaterials_{jt}$ refers to the total cost in materials of MNEs in sector j at time t.