GEP 15/15: FDI, Intermediate Inputs and Firm Performance: Theory and Evidence from Italy

Summary

This paper studies how the foreign presence of input suppliers can affect industry productivity, by disentangling the intra-firm channel (forward spillover) from the inter-firm channel (forward reallocation). We show that an important role is played by firms’ capacity to absorb additional intermediate inputs.

Abstract

This paper theoretically and empirically studies – using data from Italian manufacturing firms – how the foreign presence in the intermediate good sector (i.e. input FDI) affects firm efficiency and aggregate productivity within final good sector. We show that an important role is played by the absorptive capacity. More specifically, if all firms are able to use intermediate inputs from foreign-owned suppliers, then all of them will enjoy productivity gains from input FDI without any reallocation effect. Conversely, if only the most productive firms can use intermediate inputs from foreign-owned suppliers, while these firms can enhance further their efficiency, the other firms might suffer productivity losses from input FDI, causing some reallocation effects within final good sector.

Download the paper in PDF format

Authors

Michele Imbruno, Rosanna Pittiglio and Filippo Reganati

View all GEP discussion papers | View all School of Economics featured discussion papers