Global Investment Competitiveness Report 20192020: Rebuilding Investor Confidence in Times of Uncertainty by The World Bank Group

Author:The World Bank Group
Language: eng
Format: epub

The Vertical Spillover Effects of FDI Are Mixed

When controlling for FDI’s direct effects, the results in other sectors (vertical labor market spillovers) are less conclusive. Findings are mixed across the three countries. The results from the second-stage IV (specifications in annex 3B, equation [3B.2]) are presented in annex 3C, table 3C.7. These present sector-region coefficients that interact FDI output share with intensity of a vertical sector’s engagement with FDI. The magnitude can be hard to interpret. To aid interpretation, this table also includes the population-weighted average effects from each regression.

Ethiopia. No significant effect is found on either backward or forward linkages. This could indicate that relatively few domestic firms are currently supplying MNEs in Ethiopia. Another possibility is that the overall manufacturing sector is too small for any statistically significant results to appear.

Vietnam. The FDI backward link appears to be the most important channel. When FDI in upstream (selling) sectors increases, wages go up in the services sector (+5 percent), and formal employment in both manufacturing and services increases (+4.2 percent and +1.7 percent, respectively). Both types of increase may be the result of productivity increases linked to labor market benefits from accessing cheaper or higher-quality inputs (such as MNE producers of intermediate inputs, or in business services).

Turkey. The effect of FDI’s forward linkages is negative in manufacturing and has no effect on services. Increased FDI in downstream (buying) sectors is associated with a reduction in both formal manufacturing employment (–5 percent) and wages (–36 percent).14 One potential explanation is that MNEs are switching from domestic to foreign suppliers of intermediate inputs, prompting a decline in domestic production, labor demand, and wages of sectors with forward links to FDI. Such a finding would warrant additional analysis to better understand potential constraints between MNEs and domestic suppliers.

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