The effect of foreign direct investment (FDI) on productivity of the country well researched topic throughout literature. The article review is one of these genres wherein the author studies FDI’s effect on the domestic productivity in the UK (Haskel, Pereira & Slaughter 2007). The relevance of the topic arise due to the increased dependence of many countries on FDI as well as the common perception that increasing FDI is a definite method towards increasing productivity of the country. This essay conducts review of the article “Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?” (Haskel, Pereira & Slaughter 2007), which conducts a research into the effect of FDI on the plant level productivity of manufacturing sector in the UK. The choice of UK is due to it is a developed country with high income, and thus has many amenities missing in less developed countries, and second, no plant level effect of FDI has not been done. This essay first provides a brief summary of the article highlighting the research aim and methodology of the study. Then the findings of the study are highlighted. Then the paper is concluded with my viewpoint of the effect of FDI and if the findings of this article changed it.
Haskel, Pereira & Slaughter (2007) aim at identifying the relation between the FDI inflow and productivity on plants. The data for the research has been collected from Annual Census of Production Respondents Database (ARD). From this, they extracted the data on “operational information on inputs and outputs” which are used for calculating total productivity. For productivity measurement, they use gross output as output, input as capital, labor both skilled, unskilled, production, and nonproduction labor. They take a few measures – (1) In order to measure the robustness of their measure, they estimate total foreign employment and total employment separately. (2) The article considers employment as the active measure. (3) The study uses both present and time lagged data for measurement of productivity. (4) They distinguish UK into 11 different regions. One issue for estimation that the researchers faced was omission issue, which they solved by “time differencing and fixed effects” (Haskel, Pereira & Slaughter 2007, p. 488)
The data analyzed using baseline results. The analysis shows that productivity spillover due to inward flow of FDI is positive on the country’s productivity. The result is significant at a level of productivity elasticity of 0.05, which was their central estimate. In order to seclude endogeneity bias from the results, the researchers used two period lags. The results show that the lagged FDI presence on firm productivity is significant as compared to the contemporary FDI. In all the lagged measures for productivity, the effect is seen to be significantly positive. For one-year difference measure, the researchers use Arellano-Bond GMM estimator, which is done by adding a lag in the “dependent variable and once lagged input variable.” (Haskel, Pereira & Slaughter 2007, p. 491) This too provided significant results.
The research also does nine robustness checks for measures moving beyond concerns for endogeneity. In this case, they just report one of the estimates. They provide the key foreign presence indicators and uses US employment to measure foreign presence. Spillovers are expected more from higher technology based firms. They used foreign presence using nonproduction employment and “adding regressors controlling both for the number of British plants by industry and for the number by region (with both controls lagged one year)” (Haskel, Pereira & Slaughter 2007, p. 491). They also measure for the absorptive capacity, which is done through splitting the firms into three groups, which were based on three different performance measures. Their study suggests no significant difference in absorptive capacity of British plants. Finally, in analysis of the data after 1980 suggest that there existed qualitative differences in different levels of industrial aggregation indicating domestic firms acquired knowledge from foreign owned customers or suppliers in ancillary or “nearby” industries (Haskel, Pereira & Slaughter 2007, p. 492). In the end, the study attempts to calculate the per worker spillover effect of FDI on domestic productivity in present value. According to Haskel, Pereira & Slaughter (2007) subsidy benefits to worker series from TFP increase for domestic firms through inward FDI.
A few areas, which need to be noticed in the paper, are that these calculations are suggestive s they are based on various assumptions. Further, it does not measure for more than a single measure of productivity spillover. Then one must note that cetirus paribus assumption is held for all these calculations. The incidence of subsidy cost and benefits on host country’s government is an assumption. Here it must be noted that the spillover of productivity is on domestic firms and not to the government, so the subsidy should be paid by the firms and not the government.
The study shows that inward FDI is not always a productivity enhancer. There exists a positive correlation between inward FDI and productivity, which increases latter by 0.5%. It must be noted from the study that “per-job value of spillovers” is not always greater than “per-job incentives” provided by the government. This study established my views regarding FDI, as I always believed that proper FDI inflow could help a country increase its productivity.
Reference
Haskel, JE, Pereira, SC & Slaughter, MJ 2007, ‘Does Inward Foreign Direct Investment Boost The Productivity Of Domestic Firms?’, The Review of Economics and Statistics, vol 89, no. 3, p. 482–496.