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Productivity spillovers from FDI and the role of domestic firm’s absorptive capacity in South Korean manufacturing industries

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An Erratum to this article was published on 24 June 2015

Abstract

This paper investigates productivity spillovers from foreign direct investment (FDI) and the absorptive capacity of domestic firms using the firm level data of South Korean manufacturing industries. This paper finds that the absorptive capacity has as a role in mitigating the negative spillovers from FDI by capturing additional positive spillovers from FDI. Thus, firms without any absorptive capacity suffer more from FDI than firms with absorptive capacity. However, when the endogeneity problems in absorptive capacity such as R&D and export activity variables are considered, the role of absorptive capacity becomes too insignificant to alleviate the negative spillovers from FDI. In addition, the results from simultaneous quantile regression indicate that the effect of R&D and export activity to absorb the additional spillovers is heterogeneous depending on the conditional productivity distribution.

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Notes

  1. Zhang et al. (2010) use a domestic firm’s size and the technology gap between a foreign firm and the domestic firm as an indicator for a domestic firm’s absorptive capacity.

  2. A firm’s ownership structure, R&D investment, and alliance structure with foreign firms are suggested as alternative proxies for a firm’s absorptive capacity in Zhang et al. (2010).

  3. Kim (2013a) investigates the relationship between productivity and export activities, and Kim (2013b) examines the export spillovers effects from FDI.

  4. The detailed procedures of construction of the intermediate input deflator are similar to Javorcik (2004).

  5. The foreign firms are defined as those with at least 20 % of foreign equity ownership (Djankov and Hoekman 2000).

  6. The coefficients in the input-output matrix used in Javorcik (2004) are fixed since only one year input-output matrix is employed due to the data unavailability of an annual input-output matrix for each year. In addition, for constructing the backward spillover variable, the proportion is calculated including imports of intermediate products in Javorcik (2004). Therefore, as pointed out in Javorcik (2004), this paper is ideal in terms of construction of the precise vertical spillover variables.

  7. This corresponds to an increase of 7 percentage points in the horizontal spillover variable.

  8. This indicates an increase of 4 percentage points in the forward spillover variable.

  9. IV regression is performed by using the continuous variables of absorptive capacity such as productivity gap, the level of R&D expenditure, and export intensity.

  10. The OLS standard errors are much smaller than the IV standard errors, resulting in significant coefficient in OLS estimation and insignificant coefficient in IV estimation. According to the econometric theory, the IV estimation results in unbiased but inefficient estimates (Greene 2008). This may cause insignificant coefficients on IV estimates.

  11. The quantile regression is performed by using the indicator variables of absorptive capacity such as R&D and export activity.

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  1. Hyundai Research Institute, 1-7 Yeonji-dong, Jongno-gu, 110-470 , Seoul, South Korea

    Minjung Kim

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  1. Minjung Kim
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Correspondence to Minjung Kim.

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Kim, M. Productivity spillovers from FDI and the role of domestic firm’s absorptive capacity in South Korean manufacturing industries. Empir Econ 48, 807–827 (2015). https://doi.org/10.1007/s00181-014-0804-z

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