Solutions to enhance the Spillover effect from multinational enterprises to domestic firms

DO THI THUY LINH - NGUYEN QUANG HUY (University of Economics and Business Administration, Thai Nguyen University)


The investment of multinational enterprises (MNEs) in host countries is considered as a channel of technology transfer which is expected to improve the productivity of invested countries’ firms. The spillover effect of foreign investment can occur through four channels: Namely imitation, skills acquisition, competition and exports. Empirical studies, however, present ambiguous evidence regarding to the impact of MNEs’ technology transfer on the productivity of domestic firms, in which the positive spillover effect seems to only happen in developed countries but the effect is also quite weak. In other words, the spillover effect does not automatically appear at all domestic firms. It requires host countries and domestic firms have sufficient conditions to absorb well benefits from MNEs. These conditions may include absorptive capacity, geographical proximity, labor mobility and MNEs’ voluntariness. Local suppliers with low technology gap, close distance to MNEs and high quality workforce are more likely to gain benefits from MNEs’ technology transfer. To help domestic firms get benefits from MNEs’ investment, the local government should have policies to improve national and industrial absorptive capacity, develop special economic zones to enhance connections between domestic firms and MNEs, and develop domestic supporting industries to encourage MNEs’ willingness to share their technology and experiences.

Keywords: Multinational enterprise (MNEs), technology transfer, spillover effects.

1. Introduction

MNEs and associated foreign direct investment (FDI) have rapidly grown for the recent decades as they are considered to play an important role in the development of the host countries. One frequently referred effect of MNEs is technology transfer, which is expected to lead to productivity spillover to indigenous firms and then enable them to produce more efficiently. Many empirical studies on technology spillovers from MNEs to domestic firms, however, have given mixed results. Evidence from developed countries shows relatively weak positive productivity spillovers (Xu, 2000), while foreign presence has negative effects or no relationship with productivity of domestic firms in developing and transition countries (Ahmed, 2012; Konings, 2001).

There are a number of explanations for the ambiguous effects. It would seem that spillovers may simply be unimportant in reality or they are the result of failure in developing the statistical methods and/or the lack of datasets. Negative effects are likely due to competition effects under which multinationals with lower marginal costs attract demand away from domestic firms; or they can be explained by the lags of domestic firms’ learning from MNEs (Görg and Greenaway, 2004). Positive effects can result from the tendency for multinationals to invest in already highly productive sectors and plants (Aitken and Harrison, 1999).

While the mixed effects show that productivity spillovers are not automatically converted from MNEs to all domestic firms, it remains full expectation of positive spillovers for firms which have the sufficient conditions to absorb well the benefits from FDI. This study uses the meta analysis to find out the conditions for domestic firms to have positive spillover effects from the MNEs. The results are expected to have great contributions to the efficiency of the FDI into the host countries, as a result, promote the FDI attracting policies in these countries.

The remaining of the article is divided into three more sections. The Section 2 reviews the literature. The Sections 3 discusses the conditions for positive spillover effects. The Section 4 concludes and discusses policy implications.

2. Literature review

There are many explanations for a firm’s decision to engage in foreign direct investment FDI) as a multinational enterprises (MNEs). According to Dunning (1977), it involves three interrelated aspects – Ownership of an asset, Location to produce, and Internalization (whether to keep the asset internal to the firm) – which comprise the so-called “OLI framework” of multinational activity. But this theory concentrates on the “Greenfield” mode of FDI, where the parent firm builds a new production facility in the host country, and explains little about the cross-border mergers and acquisitions (M&As), known as “Brownfield” FDI, in which the parent firm has control over an existing indigenous firm. Gưrg, H., and Greenaway, D. (2004) state the general reason why an MNE sets up overseas is to protect its proprietary knowledge of some form.

When multinationals invest in host countries with their intangible assets, it is expected that foreign ownership will increase firms’ productivity and domestically owned firms will benefit from the presence of foreign firms (Aitken and Harrison, 1999). In this concern, MNEs are considered to be channels of technology transfer which is the process of transferring skills, knowledge, technologies, methods and samples of manufacturing, and other facilities.

Productivity spillovers can be implemented in many different ways. Gưrg, H., and Greenaway, D. (2004) present four channels through which spillovers can occur, so that the domestic firms might boost their productivity. First is imitation. It is the classic transmission mechanism which may apply to both product/ process and managerial/ organizational innovations. Its scope depends on the complexity of the origins; the simpler the origins, the easier to imitate.

Second is acquisition of human capital. After employing relatively skilled labor in the host country, the MNE will generally invest in training to make them meet the production requirements. Besides, some specific knowledge of the MNEs may spill over to domestic firms’ employees when they are exposed to new production techniques. When the experienced workers move from MNEs to domestically owned firms, or leave to start their own businesses, this valuable human capital may help raise the productivity through two mechanisms. First, a direct spillover occurs when complementary staffs improve the firms’ productivity; second, knowledge of new technology or management techniques which the employees take with them can be usefully applied in the firms.

Competition also plays an important role in adoption of new technology, according to the research results of Wang and Blomstrưm (1992), Glass and Saggi (2002). Incoming MNEs make competition become intensive for indigenous firms and lead to a reduction in inefficiency. Fierce competition forces firms to become more productive by using existing technology more efficiently, updating production techniques or imitating the MNE’s production processes. In addition, competition may increase the speed of adoption of new technology as well as the speed of imitation.

Export spillovers are another source of productivity. Through collaboration or imitation, domestic firms can learn to export from multinationals such as establishing distribution networks, creating transport infrastructure, learning about consumers’ tastes and regulatory arrangements in overseas markets (Barrios, Gưrg and Strobl, 2003; Greenaway, Sousa and Wakelin, 2004). The linkage between exporting and productivity can be explained by the firms’ self-selection into exporting (Clerides, Lach and Tybout, 1998), Bernard and Jensen (1999), or by the increase in their productivity after entering into export markets (Delgado, Fariđas and Ruano, 2002); Girma, Greenaway and Kneller, 2004).

Despite theoretically positive channels of generating technology transfer to domestic firms, evidence from empirical studies is mixed. According to Gưrg and Greenaway (2004), 19 out of 40 studies in developing, developed and transition economies report statistically significant and positive spillover effects. Xu (2000) shows that positive effects of the U.S, MNEs’ technology transfer to local firms occur in developed countries, but not in developing countries. The papers using data of developing, transition and emerging countries even find some evidence of negative spillovers in the aggregate (Ahmed, 2012; Konings, 2001). In conclusion, spillover effects from MNEs’ investment into domestic economies are complicated, depending on the characteristics of the industries and economies that receive the FDI inflows as well as the foreign investors (Buckley et al. 2010; Iršvá and Havránek, 2013).

The failure to find an unambiguous result in econometric work can be explained in a number of different ways. Followings are some of the most plausible explanations:

One possibility is that spillovers are simply insignificant in reality because MNEs may somehow prevent firm specific assets and advantages from being spilt over. In case spillovers exist, mixed effects can still be the result of the failure in developing the statistical methods and/or the lack of datasets. For example, productivity spillovers do not occur under horizontal technology transfer but through vertical relationships which are difficult to separate them out in the estimating regression. Furthermore, heterogeneity in spillovers and aggregate studies are also a serious impediment.

According to Gưrg and Greenaway (2004), negative spillovers may be due to competition effects. With some firm specific advantages, MNEs are able to cut the costs to have lower marginal costs which allow them to attract demand away from domestic firms. As a result, domestic firms are forced to reduce production and then loose market shares. In this case, fierce competition not only brings no help for local firms to generate new technology from MNEs but reduces their productivity and draws them out of the market as well. Besides, the domestic firm’s lags to learn from multinationals can be a possible reason for negative spillover obtained by short run analyses.

Aitken and Harrison (1999) explain the positive results by the tendency for multinationals to invest in already highly productive industries and plants. It means that firms with low initial productivity have little chances to benefit from MNEs’ technology transfer.

3. Conditions for Positive Spillover Effects

Empirical research has shown that foreign equity participation may be positively correlated with plan productivity, but technology spillovers are not automatically converted to all firms. It requires the host countries, as well as the domestic firms have the sufficient conditions to absorb well the benefits from MNEs. Following are some conditions for domestic firms to have positive spillover effects from MNEs.

3.1. Absorptive Capacity

Absorptive capacity of a host economy denotes the maximum amount of benefits that can be assimilated or integrated into the economy in a meaningful manner (Kalotay, 2000). Although there is not yet a standard theory on absorptive capacity and its determinants, absorptive capacity can be described at two levels: 1- the domestic firms level including the technological intensity and qualifications of labor; 2- the national level involving the technology gap, human capital resource, physical infrastructure, investment policy, administrative framework, financial and institutional development, etc. At the first level, domestic firms’ absorptive capacity has a close relationship to their initial total factor productivity.

Clearly, absorptive capacity is directly related to the potential gains from spillovers (Zang et al. 2010). Damijan et al. (2013) have shown that firms with high absorptive capacity are able to access the benefits from technology transfer. Specifically, domestic firms with small initial productivity gap are more likely to gain positive spillovers from MNEs than those with low initial productivity. Likewise, the smaller the technological gap between the domestic firms and MNEs, the higher the quality of technology transferred and the higher the potential for spillovers.

3.2. Geographical Proximity

Two important channels for technology transfer are acquisition of human capital and imitation through which indigenous labor can improve their knowledge of new technology or new management (by training and learning-by-doing) to apply in domestic firms. In this case, geographical proximity is an important factor to facilitate knowledge spillovers as “knowledge is vague, difficult to codify, and often only serendipitously recognized” (Audretsch, 1998). Therefore, firms located near multinationals are more likely to benefit than other firms.

3.3. Labor Mobility

Labor mobility can be one mechanism through which MNEs transfer positive spillovers on domestic firms (Balsvik, 2011). It is evident that domestic firms which are able to hire employees (especially managers and engineers) from the foreign firms have higher productivity. In addition, firms with younger and more skilled labor force can also increase their stock of human capital through interaction with employees from MNEs. Over long periods of time, it will become the productive advantage of domestic firms.

3.4. MNEs’ Voluntariness

The degree of spillover benefits depends on the voluntariness to transfer of MNEs - the more voluntary the MNEs, the more productive the domestic suppliers. However, MNEs’ voluntariness may be very different between the vertical and horizontal technology transfer (Havranek and Irsova, 2011).

When firms are the MNEs’ local suppliers, MNEs with voluntary help to increase domestic firms’ efficiency can benefit from high quality of the products supplied by these firms. In other words, vertical technology transfer may bring benefits to both of the givers and the recipients. In this case, the stronger the spillovers among local suppliers, the more benefits the MNEs get and the more voluntarily the MNEs transfer technology to domestic suppliers. In contrast, under horizontal technology transfer, competition with the local firms in the same industry undermines the MNEs’ incentives for technology transfer. Multinationals may preserve their specific knowledge and advantages not to leak to domestic competitors; in this case, there is no chance for spillovers.

In conclusion, technology transfer from MNEs may not have positive productivity spillover effects on all domestic firms. It is clear that firms, which have high absorptive capacity, are located close to multinationals, are able to hire employees from MNEs and receive voluntary help from MNEs, have higher potential to benefit from technology transfer and have higher productivity.

4. Conclusions and Policy Implications

This study aims to answer the question of conditions for domestic firms to benefit from the presence of foreign firms. It is difficult to have one correct answer because of the changing macro and micro factors, but those conditions may include absorptive capacity, geographical proximity, labor mobility and MNEs’ voluntariness. Domestic firms which have high absorptive capacity, are located close to multinationals, are able to hire employees from MNEs and receive voluntary help from MNEs, have higher potential to benefit from technology transfer and have higher productivity.

The findings contribute the practical framework for the empirical research in the future. Recently, most econometric analyses end up using the total factor productivity (TFP) to find the evidence of spillovers from MNEs to domestic firms. With this study, it is possible to go further to compare and point out how the different conditions of the firms, industries and the countries that receive FDI of MNEs relate with the productivity spillovers, if any. In particular, considering two firms with similar weighted average of inputs (mainly labor and capital) and similar growth in inputs, but different growth in real output; they definitely have different TFP.  To find out the reasons, the following model can be applied:

ΔTFP = β0 + β1ΔACt + β2ΔGPt + β3ΔLMt + β4ΔVOLt + εt

In which ΔTFP is the difference of total factor productivity between two firms, ΔAC is the difference of technology gaps (a proxy of absorptive capacity between two firms, ΔGP is the difference of the geographical distance from the two firms to the MNEs, ΔLM is the difference of the number of foreign staff (a proxy of labor mobility) working in two firms, ΔVOL is the difference of the number of local suppliers (a proxy of MNEs’ voluntariness) between two firms, ε is the error term, t denotes the time period. This model can also be applied at the industry or country level. If any estimated values of βi are statistically significant, it is the evidence that those factors affect the process of productivity spillovers from the MNEs to the firms - the one with more favorable conditions are expected to benefit more from the MNEs’ investment.

The limitation of this study is the shortage of empirical data to test the model in reality. The reason is the difficulty in finding the two firms with exactly similar weighted average of inputs (mainly labor and capital) and similar growth in inputs to compare their TFPs. For the future study, researchers might start with finding such firms and then apply this model using the time-series data of those two firms to figure out if the estimated βi are statistically significant.

For the time being, in order to help domestic firms to benefit more from MNEs’ investment, the government should facilitate with appropriate policies. First, to improve national and industrial absorptive capacity, the government might invest more in technology and education to have highly educated and skilled human resources; upgrade physical infrastructure; reform the administrative mechanism, and develop the financial and institutional systems. Second, to take advantages of the effects of geographical proximity, the government might continue to build up special economic areas like industrial parks, export processing zones to allow domestic firms be located near multinationals. Third, the meetings, workshops, and field trips might be held to create a chance for domestic firms to learn from the MNEs, and increase the interactions with employees from the MNEs. Fourth, the government might have policies to help domestic suppliers grow because the development of the local supporting industries might encourage the MNEs to be more willing to transfer technology and knowledge to their domestic suppliers.


1. Aitken, B.J & Harrison, A.E. (1999). "Do Domestic Firms Benefit from Foreign Investment? Evidence from Venezuela". American Economic Review 89, pp. 605 - 618.

2. Ahmed, E. M. (2012). "Are the FDI inflow spillover effects on Malaysia's economic growth input driven?". Economic Modelling, Vol. 29(4), 1498 - 1504.

3. Audretsch, D.B. (1998). "Agglomeration and the Location of Innovative Activity". Oxford Review of Economic Policy, Vol. 14, pp. 18 - 29.

4. Balsvik, R. (2011). "Is labor mobility a channel for spillovers from multinationals? Evidence from Norwegian manufacturing". The review of economics and statistics, Vol. 93(1), 285 - 297.

5. Barrios, S., Görg H. & Strobl E. (2003). "Explaining Firms' Export Behaviour: R&D, Spillovers & the Destination Market". Oxford Bulletin of Economics & Statistics, Vol. 65, pp. 475 - 496.

6. Bernard, A. & Jensen J.B. (1999). "Exceptional Exporter Performance: Cause, Effect or Both?", Journal of International Economics, Vol. 47, pp.1 - 26.

7. Buckley, P. J., Clegg, J., & Wang, C. (2010). "Is the relationship between inward FDI and spillover effects linear? An empirical examination of the case of China. In Foreign direct investment, China and the world economy", pp. 192 - 215. Palgrave Macmillan, London.

8. Clerides, S.K., Lach S. & Tybout J.R. (1998) "Is Learning by Exporting Important? Micro-dynamic Evidence from Colombia, Mexico, and Morocco", Quarterly Journal of Economics, Vol. 113, pp. 903 - 948.

9. Damijan, J. P., Rojec, M., Majcen, B., & Knell, M. (2013). "Impact of firm heterogeneity on direct and spillover effects of FDI: Micro-evidence from ten transition countries". Journal of comparative economics, 41(3), 895 - 922.

10. Delgado, M., Fariñas, J. & Ruano, S. (2002) "Firm Productivity & Export Markets: A Non-Parametric Approach", Journal of International Economics, Vol. 57, pp. 397 - 422.

11. Dunning, J.H (1977) "Trade, Location of Economic Activity & the MNE: A Search for an Eclectic Approach", The International Allocation of Economic Activity, London: Macmillan.

12. Girma, S., Greenaway, D. & Kneller, R. (2004) "Entry to Export Markets and Productivity: A Microeconometric Analysis of Matched Firms", Review of International Economics, forthcoming.

13. Glass, A.J. & Saggi, K. (2002) "Multinational Firms and Technology Transfer", Sc&inavian Journal of Economics, Vol. 104, pp. 495 - 514.

14. Görg, H. & Greenaway, D. (2004) "Much Ado About Nothing? Do Domestic Firms Really Benefit from Foreign Direct Investment?", The World Bank Research Observer, Vol. 19, pp. 171 - 197.

15. Görg, H. & Strobl, E. (2003) "Multinational Companies and Productivity Spillovers: A Meta-Analysis with a Test for Publication Bias", Center for Research on Globalization & Labour Markets, Research Paper 17.

16. Greenaway, D., Sousa, N. & Wakelin, K. (2004) "Do Domestic Firms Learn to Export from Multinationals?", European Journal of Political Economy, Vol. 20, pp. 1027 - 1043.

17. Havranek, T., & Irsova, Z. (2011). "Estimating vertical spillovers from FDI: Why results vary and what the true effect is". Journal of International Economics, Vol. 85(2), pp. 234 - 244.

18. Iršová, Z., & Havránek, T. (2013). "Determinants of horizontal spillovers from FDI: Evidence from a large meta-analysis". World Development, Vol. 42, 1 - 15.

19. Kalotay, K. (2000) "Is the Sky the Limit? The Absorptive Capacity of Central Europe for FDI", Transnacional Corporations, Vol .9 (3).

20. Wang, J. & Blomström, M. (1992) "Foreign Investment and Technology Transfer: A Simple Model", European Economic Review, Vol. 36, pp. 137 - 155.

21. Xu, B. (2000). "Multinational enterprises, technology diffusion, and host country productivity growth". Journal of development economics, Vol. 62(2), 477 - 493.





Trường Đại học Kinh tế & Quản trị kinh doanh, Đại học Thái Nguyên


Khi các công ty đa quốc gia đầu tư vào nước chủ nhà, đây được coi là một kênh chuyển giao công nghệ nhằm nâng cao năng suất của các công ty tại nước nhận đầu tư. Hiệu ứng lan toả này có thể xảy ra qua 4 kênh, gồm: Bắt chước, tiếp nhận kỹ năng, cạnh tranhxuất khẩu. Tuy nhiên, các nghiên cứu thực tế lại đưa ra các minh chứng không thống nhất về tác động của việc chuyển giao công nghệ từ các công ty đa quốc gia (MNE) đến năng suất của các doanh nghiệp trong nước, cụ thể là hiệu ứng lan tỏa chỉ xảy ra ở các nước phát triển nhưng cũng rất mờ nhạt.

Nói cách khác, hiệu ứng lan toả không tự động xuất hiện ở tất cả các doanh nghiệp, đòi hỏi nước chủ nhà cũng như các doanh nghiệp trong nước phải có đầy đủ điều kiện để hấp thụ tốt những lợi ích từ các công ty đa quốc gia. Các điều kiện này có thể bao gồm năng lực hấp thụ, khoảng cách, sự dịch chuyển lao động và sự tự nguyện của các MNE. Các doanh nghiệp trong nước với khoảng cách công nghệ nhỏ, vị trí gần các MNE và có đội ngũ nhân lực chất lượng cao sẽ có nhiều khả năng hấp thu tốt hơn từ công nghệ được chuyển giao từ các MNE. Để giúp các doanh nghiệp trong nước hưởng lợi từ đầu tư của MNEs, chính quyền địa phương cần có chính sách để nâng cao khả năng hấp thụ của ngành và của quốc gia, phát triển các đặc khu kinh tế để tăng cường kết nối giữa các công ty trong nước và MNEs, và phát triển các ngành công nghiệp hỗ trợ trong nước để khuyến khích MNEs chia sẻ công nghệ và kinh nghiệm.

Từ khóa: Công ty đa quốc gia (MNE), chuyển giao công nghệ, hiệu ứng lan tỏa.