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Foreign Entry and Spillovers with Technological Incompatibilities in the Supply Chain - Forthcoming in Journal of International Economics

Juan Carluccio () and Thibault Fally ()

Working papers from Banque de France

Abstract: Does foreign entry improve host country productivity and welfare? Previous studies have looked at the role of backward linkages with domestic suppliers and their effects on domestic competitors. In this paper, we study how these externalities are affected by technological incompatibilities between foreign and domestic technologies. When foreign technologies require specialized inputs, some local suppliers self-select into production for multinational firms. A decrease in the cost of inputs compatible with the foreign technology has heterogeneous effects. It benefits foreign firms and the most productive downstream domestic firms that adopt the foreign technology, and negatively affects firms using the domestic technology. Technological incompatibilities reduce the welfare gains from openness to FDI, but this negative effect can be overcome by domestic technology adoption. The model's predictions are consistent with the stylized facts drawn from the empirical literature on FDI spillovers.

Keywords: spillovers; FDI; technological incompatibilities. (search for similar items in EconPapers)
JEL-codes: F23 O14 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2012
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