FDI Spillovers and their Interrelationships with Trade

Foreign direct investment (FDI) represents an increasingly important dimension of internationaleconomic integration with global FDI flows growing faster than output over the past two decades. FDI is aparticular form of investment, as it transfers knowledge as well as finance that may otherwise beunavailable in the domestic economy. This paper uses firm-level data to identify FDI spillovers acrosscountries, sectors and time. The analysis suggests that knowledge-related spillovers from FDI varyconsiderably across sectors. Services industries enjoy the strongest productivity-enhancing effects of FDI,particularly through backward linkages. There is no strong evidence of horizontal productivity spillovers atthe aggregate level. The results also indicate a significant and positive correlation between the degree oftrade openness and output when measuring the impact of foreign presence in the domestic economy. Apositive interaction is found between trade liberalisation and productivity spillovers. Thus, tradeliberalisation can be seen as an important component of any reform package designed to help countriesmaximise the benefits of FDI.