Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages

Many countries strive to attract foreign direct investment (FDI) in the hope that knowledge brought by multinationals will spill over to domestic industries and increase their productivity.In contrast with earlier literature that failed to find positive intra-industry spillovers from FDI, this study focuses on effects operating across industries.The analysis, based on a firm-level panel data set from Lithuania, produces evidence consistent with positive productivity spillovers from FDI taking place through contacts between foreign affiliates and their local suppliers in upstream sectors.The data indicate that such spillovers are associated with projects with shared domestic and foreign ownership but not with fully owned foreign investments.There is no indication of spillovers occurring within the same industry or through domestic firms sourcing inputs from multinationals.