Foreign Direct Investment, Trade and Development : Firm Linkages and Knowledge Transfer

Perez Villar, Lucia

International fragmentation of production has become a major feature shaping today´s international trade. Lower trade costs regarding trade barriers, transport, and communication, allow firms to relocate production activities to more efficient production centers. This pattern has giving rise to the notion of global value chains (GVCs) to refer to investments, off-shoring and subcontracting activities that divide production processes in several value-adding stages across the globe towards the manufacture of a final good. GVCs can open opportunities for firms in developing countries to enter the global economy, diversify their exports and increase competitiveness. Being exposed to more advanced technology or managerial techniques in the context of international trade and foreign direct investment (FDI), firms in developing countries could learn and advance in the processes of structural change and industrialization catching -up. However, developmental effects from globalization do not happen automatically. Not all linkages and trade interactions are equally beneficial. The scope for knowledge exchange varies across a number of firm and country characteristics and little is still known about the underpinning knowledge exchange mechanisms that translate global engagement into firm enhanced performance in developing countries. This thesis is composed by three chapters aim at shedding light on the underpinning mechanisms behind vertical spillovers of global engagement. Each chapter looks closely at one of the three subsequent necessary steps for the materialization of spillovers: 1) That there is a trade relationship with global buyers is established by domestic firms (the backward linkage); 2) that there is a knowledge transfer involved in the vertical linkage and, 3) that knowledge is assimilated through a learning process in the domestic sector that translates into enhanced performance.

International fragmentation of production has become a major feature shaping today´s international trade. Lower trade costs regarding trade barriers, transport, and communication, allow firms to relocate production activities to more efficient production centers. This pattern has giving rise to the notion of global value chains (GVCs) to refer to investments, off-shoring and subcontracting activities that divide production processes in several value-adding stages across the globe towards the manufacture of a final good. GVCs can open opportunities for firms in developing countries to enter the global economy, diversify their exports and increase competitiveness. Being exposed to more advanced technology or managerial techniques in the context of international trade and foreign direct investment (FDI), firms in developing countries could learn and advance in the processes of structural change and industrialization catching -up. However, developmental effects from globalization do not happen automatically. Not all linkages and trade interactions are equally beneficial. The scope for knowledge exchange varies across a number of firm and country characteristics and little is still known about the underpinning knowledge exchange mechanisms that translate global engagement into firm enhanced performance in developing countries. This thesis is composed by three chapters aim at shedding light on the underpinning mechanisms behind vertical spillovers of global engagement. Each chapter looks closely at one of the three subsequent necessary steps for the materialization of spillovers: 1) That there is a trade relationship with global buyers is established by domestic firms (the backward linkage); 2) that there is a knowledge transfer involved in the vertical linkage and, 3) that knowledge is assimilated through a learning process in the domestic sector that translates into enhanced performance.

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Perez Villar, Lucia: Foreign Direct Investment, Trade and Development. Firm Linkages and Knowledge Transfer. 2017.

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