Foreign Direct Investment and Efﬁ ciency: A Stochastic Frontier Analysis
Foreign direct investment (FDI) is considered to play an impor-tant role in recipient economies, especially in the developing economies. Foreign ﬁ rms bring with them technical knowhow, equipment, management, marketing, and other skills. They may give rise to different types of externalities in the host country, which in turn generate spillovers. Productivity spillovers from FDI occur through three channels: (a) when skilled workers who once worked for the FDI ﬁ rms move to local ﬁ rms, it results in local productivity growth (Blomström and Persson, 1983; UNCTAD, 1999); (b) due to demonstration effect the mere presence of foreign products in domestic markets can stimulate domestic ﬁ rms’ creative thinking and thus help generate blueprints for new products and processes. The technologies that FDI ﬁ rms bring in have already been tested by consumers in the foreign markets; similar products and technologies will likely work well for the host country as well; and (c) due to the competitive effect, Caves (1974) argues that the entry of a foreign ﬁ rm into local markets can force more active rivalry and an improvement in performance than would a domestic ﬁ rm at the same scale. This is because FDI is thought of as a vehicle for disseminating the transfer of technology, including a higher level of technical efﬁ ciency.