How do foreign direct investment spillovers affect local firms' productivity and innovation?

FDI plays great important in economic growth. Take Germany: foreign businesses inject fresh ideas and innovations, particularly in sectors like IT. They introduce solutions that are not only more competitive but also foster creativity. This influx of competition, especially in customer service, where Germany has room for improvement, serves as a catalyst for domestic companies to enhance their performance. Working daily to support FDI in Germany, it's regrettable to acknowledge that bureaucratic hurdles impede investment. For example, non-EU citizens encounter difficulties opening bank accounts for their companies and obtaining tax numbers for startups can take 4-6 months. Such bureaucracy undermines Germany's economic prospects.

A major western company decided to build a plant in Taiwan. The project attracted the attention of the political opposition, who picked up on very long and deeply grounded worries for the environment, and initiated a protest movement. It was the first large-scale, organized movement of what was to become the first East Asian peaceful transfer of power from a single-party dictatorship to a broadly representative democratic government. In the process, Taiwan significantly stiffened its environmental protection, forcing heavily polluting domestic companies to change their ways. (The FDI project was for a plant that met US environmental standards). Spillovers and externalities, both political and environmental, due to a foreign FDI project.

Horizontal spillovers occur when local firms in the same industry as the FDI enterprise benefit from the presence of the foreign firm. This can happen through a variety of mechanisms, such as: Demonstration effects: Local firms may observe the foreign firm's best practices and adopt them in their own operations. Competition: The increased competition from the foreign firm can force local firms to become more efficient and innovative. Input-output linkages: Local firms may benefit from increased demand for their inputs or services as a result of the foreign firm's presence.

Vertical spillovers occur when local firms in upstream or downstream industries benefit from the presence of the FDI enterprise. This can happen through: Forward linkages: Local firms that supply inputs to the foreign firm may benefit from increased demand for their products or services. Backward linkages: Local firms that purchase inputs from the foreign firm may benefit from access to new technologies or improved quality standards.

It is important to note that the effects of FDI spillovers can vary significantly across different industries, regions, and firms. Some studies have found that spillovers are more likely to occur in certain industries, such as high-tech or manufacturing, while others have found that spillovers are more likely to occur in regions with a higher concentration of foreign firms.

Increasing in FDI doesn't mean that you have the benefits of its spillovers. Especially if the FDI is from countries similar to your country in technology and in the exporting product, spillovers can have negative effects such as crowding out of domestic firms! For example, if your industries are labor-intensive, it's better to attract FDI from a country with capital-intensive industries. In fact, you have to acquire what you don't have, with FDI. So, in the first step, you should know what you want from FDI? The other point: there should be a policy that guarantees the spillovers. Going blindly towards FDI will do nothing. By doing this, you only provide your resources to foreign capital. This is the reason why policy is important here.

Many countries impose localization requirements on goods produced by foreign companies within their territory. Localization refers to the percentage of locally sourced components and materials in the overall product. These requirements serve as both a barrier to FDI on one hand and an incentive for foreign companies to attract and develop local suppliers on the other hand. This practice is particularly prevalent in industries such as machinery manufacturing, automotive production, and the like.

Understanding the effects of FDI spillovers has important policy implications. Governments can implement policies to encourage FDI and maximize its benefits for local firms. For example, governments can provide incentives for foreign firms to invest in regions with low levels of economic development or in industries with high potential for spillovers. Additionally, governments can invest in education and training programs to improve the absorptive capacity of local firms. In conclusion, FDI spillovers can have a significant impact on local firms' productivity and innovation. By understanding the different types of spillovers