Paper No October Anabel Marin* and Martin Bell** (*SPRU and Universidad Nacional de General Sarmiento, **SPRU)

Transcription

1 SPRU Electronc Workng Paper Seres Paper No. 118 Technology Spllovers from Foregn Drect Investment (FDI): an Exploraton of the Actve Role of MNC Subsdares n the Case of Argentna n the 1990s Anabel Marn* and Martn Bell** (*SPRU and Unversdad Naconal de General Sarmento, **SPRU) October 2004 The Freeman Centre, Unversty of Sussex, Falmer, Brghton BN1 9QE, UK Tel: +44 (0) E-mal: m.bell@sussex.ac.uk

2 Technology spllovers from foregn drect nvestment (FDI): An exploraton of the actve role of MNC subsdares n the case of Argentna n the 1990s Anabel Marn 1 and Martn Bell 2 October 2004 Abstract The usual perspectve on technology spllovers from FDI sees the MNC subsdary as a passve actor. It presumes that the technologcal superorty that spreads from subsdares to other frms n the host economy s ntally created outsde t by MNC parent companes, and s delvered to subsdares va nternatonal technology transfer. The role of subsdares s lttle more than to act as a leaky contaner lyng between the technology transfer ppelne and the absorpton of spllovers by domestc frms. Ths paper suggests a dfferent model n whch a substantal part of the potental for spllover s created wthn local subsdares as a result of ther own knowledgecreatng and accumulatng actvtes n the host economy. We explore emprcally the effects of these actvtes on technology spllovers from FDI usng data for ndustral frms n Argentna over the perod The analyss suggests that sgnfcant results can be obtaned ncorporatng subsdares own technologcal actvtes as an explanatory varable of the spllover process. Key words: FDI, technology spllovers, absorptve capabltes, multnatonal enterprses, subsdares technology behavour Acknowledgements. We are grateful for comments receved from partcpants at the Summer DRUID Conference 2003, and the Workshop: Understandng FDI-Asssted Economc Development, TIK Centre, Unversty of Oslo, Norway May We also apprecate helpful comments from Valera Arza. 1 2 Anabel Marn, SPRU Scence and Technology Polcy Research, Unversty of Sussex and Unversdad Naconal de General Sarmento (UNGS), Campus Unverstaro, Los Polvornes, Pca. De Buenos Ares, Argentna. Tel: E-mal: amarn@ungs.edu.ar Martn Bell, SPRU - Scence and Technology Polcy Research, Freeman Centre, Unversty of Sussex. Brghton BN1 9QE. Tel: +44 (0) , +44 (0) , Fax: +44 (0) E-mal: M.Bell@sussex.ac.uk 1

3 1-The Purpose of the Paper Analyses of the technologcal spllover mpact of FDI on host economes have typcally assumed the mpact to be the outcome of two lnked steps. The frst nvolves multnatonal corporaton (MNC) parent-to-subsdary nternatonal transfer of technology that s superor to the prevalng technology n the host economy. The second nvolves the subsequent spread of ths technology to domestc frms a technologcal spllover effect. The latter has been addressed n a growng number of spllover studes n varous host economes (Lpsey, 2004; Gorg and Strobl, 2001). Ths paper suggests t s mportant to consder a dfferent model of the process. In ths alternatve a substantal part of the technologcal potental for spllover s generated wthn the local subsdary by ts own knowledge-creatng actvtes, rather than beng delvered to t from the parent company. To some degree, therefore, varablty n the sgnfcance of spllovers would reflect heterogenety n the ntensty of subsdares nnovaton and other knowledge-creatng actvtes n the host economy. Usng data for ndustral frms n Argentna over the perod we explore emprcally the possble sgnfcance of ths alternatve model. The structure of the paper s as follows. Secton 2 revews prevous approaches to the analyss of FDI-related spllovers and elaborates on the alternatve approach used n ths paper. Secton 3 descrbes the methods and data used n ths study and the emprcal results are presented n Secton Alternatve Perspectves on FDI-related Technology Spllovers n Host Economes The centrally drven supply-sde orgns of spllovers (a) The orgnal ppelne model There s now a long hstory of emprcal analyss of FDI-related technologcal spllovers, runnng from the early work of Caves and Globerman n the 1970s to the rapdly growng number of such studes n the last ten years e.g. Atken and Harrson (1999), Kokko (1994), Blomstrom and Sjoholm (1999), and Haskel et al. (2002). Snce the work of Stephen Hymer n the 1960s (publshed 1976), a core element n the theoretcal framework underlyng ths work has concerned MNC possesson and explotaton of technologcal assets an ownershp advantage seen as the man reason for the MNC s exstence. A second, usually mplct, element s the assumpton that the MNC s a tghtly ntegrated organsaton, wth the behavour of subsdares closely shaped by central strateges and decsons. The combnaton of centrally accumulated technologcal assets and tghtly 1 A more extended dscusson of these alternatve perspectves on the FDI-related spllover process s provded n Bell and Marn (2004) 2

4 ntegrated organsatonal behavour sets the bass for the two-step ppelne that delvers spllovers of superor technology from MNC parents to domestc frms wthout any sgnfcantly actve role on the part of the local MNC subsdares. 2 They are smply leaky contaners at the end of the transfer stage of the process. 3 Emprcal studes have not however ndcated the wdespread and sgnfcant spllover effects one mght expect on the bass of ths model (Gorg and Greenaway 2004). Instead, much of the evdence s contradctory (Lpsey, 2004; Gorg and Strobl, 2001). Early studes usng ndustry level and crosssectonal desgns (e.g. Caves, 1974 or Globerman, 1979) found postve results but were unable to dentfy the relevant causalty. 4 More recent studes have exclusvely used frm level desgns, typcally combned wth panel data analyss. Although such studes have found evdence of spllovers n some cases (e.g. Haskel et al., 2002; Keller and Yeaple, 2003), the generally postve results n the earler research have not been replcated n a wde range of countres. 5 (b) Medatng varables: lmted absorptve capablty - a possble demand sde constrant Research attenton has shfted to explore whether the lmted capabltes of locally owned frms act as a constrant on ther ablty to absorb the potentally avalable spllovers from MNCs a suggested constrant on the demand sde of the spllover process. There are, however, two problems wth ths approach. Frst, t does not queston the centrally-drven supply sde model. It merely bolts on the end a postulated demand-sde explanaton for the nconclusve and negatve results from the smpler ppelne models. Second, the evdence from these approaches s stll mxed. For nstance, Kokko (1994) n the case of Mexco, and Konngs (2001) for Poland and Bulgara have found such 2 Such spllovers are usually seen as productvty gans for domestc frms arsng n two ways. Frst, the knowledge ntally transferred from the parent dffuses from the subsdary va varous channels and s captured as an externalty by domestc frms. Second, the subsdary s superor performance brngs greater compettve pressure to bear on domestc frms, whch are nduced to respond by generatng ther own technologcal change. These, however, are very dfferent mechansms. The frst s about non-market medated knowledge dffuson from MNE subsdares. The second s about domestc frms ncurrng the costs of generatng knowledge by ther own efforts or by acqurng t through market channels that have nothng to do wth the FDI presence. To some unknown extent, therefore, the second type of productvty gan consttutes a pseudo spllover. 3 Ths perspectve has been summarsed recently by two of the most prolfc contrbutors to the emprcal analyss of FDI-related spllovers. It s well known that multnatonal corporatons produce most of the world s advanced technology. When a MNC sets up a foregn afflate, the afflate receves some amount of the propretary technology that consttutes the parent s frm-specfc advantage.. Ths leads to a geographcal dffuson of technology, but not necessarly to any formal transfer of technology beyond the boundares of the MNC. However, MNC technology may stll leak to the surroundng economy through external effects or spllovers that rase the level of human captal n the host country and ncrease productvty n local frms. (Blomstrom and Kokko, 2003, p. 3) 4 Ths s because postve results from ths type of research desgn may result from MNCs locatng n what are already relatvely hgh-productvty sectors n the host economy (Atken and Harrson, 1999). 5 E.g. In Sweden (Braconer et al., 2001) or the USA (Chung, 2001), as well as n transton or ndustralsng economes such as Morocco (Haddad and Harrson, 1993), the Czech Republc (Djankov and Hoekman, 2000), Venezuela (Atken 3

5 demand-sde effects to be sgnfcant. But other studes have not found the same results: for example Haskel et al. (2002), Damjan et al. (2003), Patbandla and Sanyal (2005), and Sjoholm (1999). 6 (c) Medatng varables: ndustry dfferences and corporate strategy - supply sde constrants Lookng at the other sde of the process several recent studes have questoned the assumed homogenety of MNC behavour that has underpnned most emprcal analyses to date. In partcular, two knds of MNC dversty have been seen as possbly nfluencng, often n combnaton, the types of technology that MNCs transfer to subsdares, and hence the scale and sgnfcance of the knowledge resources n subsdares that may subsequently leak to domestc frms. The frst s dversty n the characterstcs of the ndustres n whch MNCs operate. Advanced ndustres such as electroncs, are thought to possess greater potental than more tradtonal ndustres for generatng spllovers because they use more recent vntages of technology, employ greater numbers of sklled workers and undertake more R&D. Also, wthn a partcular type of ndustry, the ntensty of the value-addng actvtes mght provde, t s argued, dfferng opportuntes for technology spllovers (Narula and Dunnng, 2000). The structure of world markets n partcular ndustres may also be a source of varablty n the content of technology transferred through FDI, and hence n the potental for subsequent spllovers. For example, Dunnng and Cantwell (1986) have argued that f a global ndustry s concentrated amongst only a few MNCs, there wll be lower ncentves to decentralse more knowledge-ntensve actvtes, and therefore the potental for spllovers wll be more lmted. The second type of heterogenety s about dfferences n the centrally drven strateges of MNCs. Wang and Blomstrom (1992), for nstance, developed a model n whch nternatonal technology transfer emerges from parent company decsons n the lght of expected strategc nteracton between ther foregn subsdares and the technologcal characterstcs of host country frms: the hgher the host country frms nvestment n learnng, the more advanced the technology transferred n order to ensure proftablty n the face of more technologcally capable competton. 7 Reflectng a more recent drecton of work on MNC strateges, Chung (2001) ntroduced a dstncton between and Harrson, 1999) or Poland, Bulgara and Romana (Konngs, 2001). 6 Partcularly nterestng among these are studes (e.g. Haskel et al., 2002) fndng nverse relatonshps between spllovers and domestc frms capabltes. Ths returns to Fndlay s earler (1978) proposton: the wder the technologcal dsparty between foregn and domestc frms the greater the opportuntes for domestc frms to mprove effcency. 7 Thus, as wth the absorptve capablty model, the technologcal abltes of local frms are seen as an mportant nfluence on spllovers but n ths case va ther effect on the nternatonal transfer step. 4

6 capablty-explotng and augmentng strateges as possble nfluences on technologcal spllovers n the USA. These vews about heterogenety on the supply sde have not, for the most part, been emprcally evaluated. 8 In addton, they leave ntact the centrally drven model of spllover generaton va the technology transfer process: varablty s seen as arsng from MNC decsons about the nternatonal transfer step n the process. Subsdares contnue to be seen as playng a passve role and, f they occur at all, ther R&D and other knowledge-creatng actvtes are assumed to be merely reflectons of parent company decsons. As emphassed by Frost (2001), we stll have a very lmted understandng of the processes of technologcal change n foregn subsdares, and consequently even less about whether and how those may contrbute to the spllover effects of FDI. 2.2 Subsdares technologcal actvtes: Locally Drven Sources of Spllovers? A body of recent research has addressed ssues about FDI from the bottom-up focusng prmarly on the development of subsdares as unque and dfferentated organsatonal enttes. Ths research has shown that varaton n nnovatve capabltes across subsdares, and over tme, depends on much more than the centralsed decsons of the parent company ncludng (a) the decsons and strateges of subsdares themselves and (b) aspects of the local envronment that create constrants and opportuntes for subsdares. As emphassed by Brknshaw and Hood (1998): the subsdary s capabltes are, to some extent, dstnct from the capabltes of headquarters operaton and ts sster subsdares. the partcular geographcal settng and hstory of the subsdary are responsble for defnng a development path that s absolutely unque to that subsdary, whch, n turn, results n a profle of capabltes that s unque. (p. 781) One mplcaton s that subsdares may themselves affect the potental for generatng spllovers nto the domestc economy. We are aware of only two studes that have begun to explore ths possblty. Braconer et al. (2001) used MNC subsdares R&D expendture as a better measure of FDI actvtes n Sweden than the more commonly used measures of total FDI fnancal flows, though they found no evdence of spllovers usng that ndcator. Todo and Myamoto (2002) used two ndcators of technologcal actvtes n MNC subsdares to estmate spllovers n Indonesa: the commonly used R&D-based ndcator (R&D expendtures) and what they called a human resources development ndcator (measured by the subsdares expendtures on tranng). They found that 8 Chung (2001) s an excepton. 5

7 only subsdares engaged n R&D and tranng had a postve mpact on the productvty of domestc frms. In the rest of ths paper we move further n ths drecton. We derve a number of ndcators wth whch to characterse the knowledge-creatng and accumulatng actvtes of MNC subsdares n Argentna, and we examne emprcally the mportance of heterogenety n those actvtes as a source of dfferences n technology spllovers. In partcular we test the followng three hypotheses: (1) The Ppelne model: spllover effects arse from FDI ndependently of both the absorptve capabltes of domestc frms and the knowledge-creatng and accumulatng actvtes of subsdares n the host country. (2) The Absorptve Capablty model: potental spllover effects arse from FDI, but are captured only by domestc frms wth hgh absorptve capabltes. (3) The Actve Subsdary model: spllover effects arse from FDI only when foregn afflates are technologcally actve n the host country. 3. Data and Methods 3.1 The Data Source: The Argentne Innovaton Survey The emprcal analyss reported here uses nformaton provded by the Innovaton Survey n Argentna, The sample used n the survey (1533 frms, 283 of whch are MNC subsdares) 9 s representatve of the total populaton of ndustral frms n the country: t ncludes 50 per cent of all ndustral frms, and these account for 53 per cent of total sales, 50 per cent of total employment, and 61 per cent of total exports. The survey provdes basc economc nformaton at the frm level for 1992 and 1996 (sze, age, added value, exports, mports, sales, employment, etc), and these permt the computaton of varous performance ndcators (e.g. productvty levels and growth rates). In addton, followng the broad framework of the Oslo Manual t provdes nformaton about a wde range of technologcal actvtes at the frm level and ths allows the computaton of several measures of technologcal behavour on the part of both MNC subsdares and domestc frms, as explaned n Secton A company s defned n ths study as a subsdary n whch the proporton of foregn ownershp s hgher than 10%. 6

8 Gven macroeconomc changes 10 n the 1990s and a fnancal crss that began n 2000, Argentna mght seem an dosyncratc case study. We note however that an mportant number of ndustralsng countres ntroduced smlar macroeconomc changes durng the 1990s, followng the Washngton Consensus, and consequently the Argentnean case s more the rule than the excepton. 11 Furthermore, the Argentnean fnancal crss only started sgnfcantly to affect nternal economc actvty from The perod we analyse ( ) was charactersed by sustaned growth: on average 6% per annum. Argentna also provdes a partcularly approprate and demandng context for examnng the possble merts of spllover models for at least two reasons. Frst, t has a relatvely FDI-ntensve ndustral economy, reflected for example n the fact that FDI va wholly owned MNC subsdares accounted for 50% of the largest ndustral frms n 2002 (Kulfas et al., 2002). Second, t s a mature ndustralsng economy wth substantal human resources and pror ndustral experence, consttutng a substantal base of absorptve capacty to capture potentally avalable spllovers. 3.2 Measurng the Innovaton Actvty of MNC subsdares and the Absorptve Capactes of domestc frms The Innovaton Survey data was used to compute a number of dfferent ndcators of the technologcal actvtes of MNC subsdares and domestc frms. 12 Ten such ndcators are used n ths analyss, grouped below n three broad categores. 13 (a) Investment n dsemboded knowledge and sklls In prncple, nvestment n dsemboded knowledge and sklls s potentally the most mportant source of locally-drven knowledge spllovers from subsdares to domestc frms snce t covers the knds of knowledge that are potentally most moble and most lkely to leak from subsdares. Four ndcators are used: R&D ntensty: - reported expendture on R&D* Skll tranng ntensty: 10 These changes nclude: trade lberalsaton (e.g. all captal goods tarffs were reduced to zero durng ), captal lberalsaton (e.g. no captal controls, no mnmum terms, no sectoral restrctons to FDI, no requrements for FDI), prvatsaton (large role played by MNC), country rsk reducton due to debt renegotaton (Brady Plan, fnshed n 1992) 11 In addton, as we wll see later, we have ntroduced several measures to control for changes n the levels of competton across ndustres, and the use of ndustry dummes should control for the possblty that macroeconomc changes have affected dfferent ndustres dssmlarly. 12 Annex 1 descrbes the dataset and provdes further nformaton about the dervaton of these ndcators, together wth descrptve statstcs. 7

9 - reported expendture on tranng* Skll ntensty of employment: - the number of engneers, other professonals and techncans employed n producton (not n management) as a proporton of total employment Investment n lcensed technology: 14 - reported payments for lcensed desgns, know-how, etc.* (b) Investment n captal-emboded technology Investment n captal-emboded technology s lkely to be a very mportant source of productvty growth n the nvestng frms but t appears less lkely to be a sgnfcant drver of genune spllovers to other frms. Although nformaton about the ntroducton of captal emboded assets n one frm may leak to another, the knowledge actually emboded n those assets s probably much more stcky. Three ndcators are used: Investment n nformaton technologes: - reported expendture specfcally on IT facltes and systems* Investment n equpment for nnovaton: - reported expendture on equpment requred to ntroduce new products and processes* Investment n mported captal goods: - reported expendture on mports of captal goods.* (c) The nnovaton strategy of the enterprse The Innovaton Survey asked frms about the mportance they attached to broad aspects of ther nnovatve actvty. Responses to these questons were used to compute three ndcators as follows. The mportance of sgnfcant product nnovaton: - Frms were classfed nto two groups: those attachng H and Lo mportance to sgnfcant product nnovaton, valued 1 and 0 respectvely. The mportance of sgnfcant process nnovaton: - Frms were classfed nto two groups: those attachng H and Lo mportance to sgnfcant process nnovaton, valued 1 and 0 respectvely. The mportance of nnovaton n frm strategy: 13 When used as frm-level ndcators, all the measures dentfed wth an astersk are normalsed by the frm s total sales. 14 Only a small number of frms reported any lcensng payments. Ths measure s therefore excluded from the estmates for the ndvdual varables, but s ncluded n the factor analyss to compute a composte ndex of technologcal actvty. 8

10 - Frms were classfed nto two groups ( H and Lo ), dstngushng between those that consdered selected nnovatve actvtes had been (a) decsve or only (b) sgnfcant or non-sgnfcant for ther busness strategy. In the analyss, the above ten ndcators are employed n two ways. Frst, they are combned n a composte ndex of absorptve capablty and technologcal behavour. The ndex was calculated usng factor analyss, and the weghts of the dfferent varables are therefore endogenously determned rather than mposed exogenously by ourselves. 15 However, the jont varaton of these ndcators s lmted. 16 Consequently, n a second approach we use the ten ndcators separately, reflectng partcular knds of nnovatve actvty undertaken by the frms. Both the composte and the separate ndcators are frst computed for domestc frms and used as ndcators of ther absorptve capabltes when we assess the sgnfcance of ths factor n explanng spllover effects (see Secton 4.1.2). Second, they are computed for local subsdares and used to ndcate the heterogenety of ther technologcal behavour, and also to assess whether that heterogenety s smply a matter of nter-ndustry dfferences or somethng more specfc to ndvdual frms (see Secton 4.2) Estmatng the spllover effects of subsdares technologcal actvtes Two steps are taken. Frst, we characterse each of the 157 fve-dgt ndustres n the data set accordng to the technologcal behavour of MNC subsdares n that ndustry. 18 We then dstngush between two types of ndustry: (a) ndustres charactersed by a relatvely hgh ntensty of technologcal actvtes on the part of subsdares and, (b) ndustres charactersed by a relatvely low ntensty. The dstncton s made frst usng the composte ndex of technologcal behavour and second usng each ndvdual ndcator separately. Medan values of the ndex and of each ndcator are used to 15 See Annex II for an explanaton of the methodology and the values of the composte ndces. 16 Usng only one factor, for nstance, the total varance explaned for ths factor s 26% and 24% respectvely for absorptve capabltes and technology behavour of subsdares - see Annex II. 17 In both these applcatons, all the measures are computed n levels ether as an average across the four-year perod, or by a measure at the end of the perod n The measures are computed as frm-specfc ndcators and normalsed where approprate. 18 Industres at the fve-dgt level are taken as the sphere of knowledge-centred nteracton between subsdares and domestc frms, and hence as the economc spaces wthn whch spllovers mght arse. We therefore estmate only ntra-ndustry spllovers recognsng that ths wll only partally capture vertcal spllovers, so probably underestmatng postve spllover effects. 9

11 dstngush between hgh and low ntensty of technologcal actvty. Second, spllovers from FDI to domestc frms are then estmated for two dfferent groups of domestc frms: (a) those located n fve-dgt ndustres charactersed by a relatvely hgh ntensty of technologcal actvty on the part of subsdares, and (b) those located n fve-dgt ndustres charactersed by a relatvely low ntensty. 19 When spllovers are sgnfcant for a partcular group of domestc frms, we clam that the partcular subsdares technologcal behavour (used to dstngush ndustres and frms) s the supply-sde source of ths effect. We model FDI spllovers wthn the famlar producton functon framework. Change n FDI partcpaton n ndustres s treated as an addtonal nput explanng the productvty growth of domestc frms, and ts coeffcent s taken as evdence of spllover effects from FDI. 20 Varatons of the followng basc equaton 21 were used to nvestgate spllover effects: d d d d ln Y j = λ ln Input j + δ FDIpart j + ηz j + G j + I j + ε (1) j In (1), d denotes domestc frms, subscrpts and j denote plant and ndustry, represents changes n the varables between 1992 and 1996 (t-4), and λ, δ, and η are parameters to be estmated. Y d denotes added value of domestc plants, Input, ther use of normal nputs, FDIpart s a measure of the scale of the FDI presence n each ndustry. Z s a set of plant and ndustry level control varables. G and I are dummes for corporate groups and ndustres respectvely. For Input, we use total employment (L) and the rato of nvestment to added value (I/Y). 19 Annex III shows the dstrbuton of domestc frms relatve to the varous ndcators of subsdares technologcal behavour. 20 We are aware that the use of producton functons and the avalable technques to estmate spllovers nvolves a number of well-known problems. We nevertheless use ths method for two reasons. Frst, because we want to be able to compare our results wth the bulk of prevous work n ths area, especally wth respect to the estmaton of spllovers n ndustralsng countres for whch patent analyss s not relevant. Second, despte all the problems of producton functon analyss, we concur wth the vew of Grlches and Maresse (1998) that t s hard even to pose the queston wthout embeddng t n such a framework. 21 The dervaton of ths equaton s provded n Annex IV. 10

12 FDIpart s the share of total employment n the 5-dgt ndustry j that s accounted for by all employment n foregn owned frms n the ndustry. 22 We use an ndcator based on employment rather than captal because labour turnover s lkely to be a partcularly mportant channel for spllover effects. G s a categorcal dummy varable that dstngushes ndependent domestc frms from those that are part of a domestc conglomerate. I s a dummy varable dstngushng the 22 two-dgt ndustres. Z ncludes a set of addtonal varables that may affect TFP growth n domestc frms: (a) KC d = change n knowledge captal, as reflected n R&D expendtures plus changes n the expendture on new equpment specfcally concerned wth product or process nnovaton 23 (b) Sklls d = change n the professonal/non professonal rato (professonals nclude engneers and other professonals n producton, admnstraton and R&D) (c) Comp d = change n competton. We expect that the ncreases n KC and Sklls wll postvely affect changes n total factor productvty of domestc frms through ther effects on ther knowledge captal (Grlches, 1992). Ther ncluson therefore reduces the possblty of bas due to non-ncluded varables that change across domestc frms and over tme. Varables reflectng changes n competton are also ntroduced: changes n ndustry concentraton and n mport penetraton. These are ntended to account for what we descrbed earler (endnote 2) as pseudo spllovers technologcal changes generated by domestc frms n response to ncreased competton from FDI. In addton, these varables should also capture changes n other unobservable varables that affect competton and that mght have dscplned the domestc ndustry to become 22 Ths ndcator was constructed on the bass of the nformaton provded by the 50% sample survey because data about FDI penetraton at the 5-dgt level for the whole economy do not exst. However, the Survey sample ncluded all of the 500 largest ndustral frms n Argentna. Snce MNC subsdares n manufacturng ndustres n Argentna are typcally large, almost all of them are probably ncluded n the sample of 283 subsdares. 23 R&D expendture s not a good ndcator of the technologcal efforts of frms n developng countres n augmentng ther knowledge captal, snce such efforts are generally not formalsed as explct R&D actvtes. We therefore nclude expendtures on equpment for product or process nnovaton as an addtonal ndcator of these efforts. 11

13 more effcent. 24 The expanded equaton s as follows: ln Y d = α ln L + α Im pen 7 1 j + G d d I + α 2 Y + I j + ε + α FDIpart 3 j + α Sklls 4 + α KC 5 + α Concen 6 j (1 ) Where: ln Y = The log change n value added ln L = The log change n total employment I/L = The rato of total nvestment to total output 1992 FDIpart j = The change n FDI partcpaton by ndustry Sklls = The change n the rato professonal/non-professonal workers KC = The log change n R&D expendtures plus the log change n the expendtures n new equpment for product and process nnovaton Concen j = The change n Herfndahl ndex (ndustry level) Impen j = The change n mport penetraton (ndustry level) ε = u. Several aspects of the estmaton methods mert bref further comment. Frst, by usng a plant level specfcaton and modellng n frst dfferences - wth a tme perod of 4 years - we control for fxed dfferences n productvty levels across frms and ndustres, whch mght affect the level of foregn nvestment. In ths way, we address the dentfcaton problem hghlghted by Atken and Harrson (1999), as noted earler. 25 Second, ths specfcaton and the ncluson of group and ndustry dummes (G and I) also corrects for the omsson of other unobservable varables that mght undermne the relatonshp between FDI and productvty growth of domestc frms. In partcular: by observng changes over tme, we remove plant-specfc, ndustry and regonal fxed effects such as heterogeneous long-term strateges of the frms, and dfferences n the regonal nfrastructure and/or technologcal opportunty of the ndustres As noted earler, ths s mportant n Argentna between 1992 and 1996, because mportant pro-market reforms were ntroduced and ntensfed durng those years. 25 Nevertheless we cannot completely rule out the possblty of spurous correlaton f there are ndustry characterstcs that change over tme and affect the pattern of FDI. 26 Ths also removes other factors that even when they are not fxed over tme mght be roughly constant over a 4-year perod, such as the level of educaton, or regonal polces. 12

14 the use of dummy varables removes fxed characterstcs of domestc frms that belong to an economc group or that operate wthn partcular sectors. These controls are mportant n ths analyss because, as dscussed earler, ndustry effects are often consdered lkely to affect spllovers from FDI. Thrd, there could stll be a bas n the estmators f there are mportant unobserved varables excluded from the model that change across frms and over tme (such as the manageral abltes of domestc frms). By ntroducng the control varables under Z - that change across frms and over tme - and by modellng n frst dfferences we expect to mnmse ths possblty. 27 Fourth, t has been suggested also that, to estmate the coeffcents n a producton functon, captal and labour nputs should be treated as endogenous (Grlches and Maresse, 1998). Here the focus, nevertheless, s not on estmatng the coeffcents on captal and labour, but on estmatng δ (the coeffcent for FDI). Endogenety of captal and labour therefore s an ssue only f t results n based estmates of δ. Also, a plant-level specfcaton n a frst dfferences model should correct for ths possble bas f the endogenety s caused by an omtted varable and the varable does not change over tme (Grlches and Maresse, 1998). Ffth, n prncple there mght be a problem about representatveness snce FDIpart s calculated from the sample data. In practce, however, because t s very lkely that all MNC subsdares are ncluded n our survey (see note 22), t s also very lkely that the dstrbuton of foregn afflates across ndustres for the sample and the populaton are very smlar. 28 Fnally, a need for cauton arses from an element of selecton bas because our data do not represent the full populaton of plants, only the survvng plants present n both 1992 and Our estmators of the mpact of FDI should therefore be nterpreted only wth respect to survvng frms We wll not, therefore, ntroduce other methods to address ths ssue (such as those proposed by Olley and Pakes, 1996) because they usually requre very restrctve assumptons about, for nstance, markets and, therefore, as ponted by Grlches and Maresse (1998), they may ntroduce addtonal bas n the estmatons. 28 We may stll be overestmatng FDIpart because all MNC subsdares are probably ncluded n the sample but not all domestc frms. However ths s lkely to be of lmted mportance because we are nterested n the changes rather than the levels of FDI partcpaton (our estmatons are n frst dfferences). 29 In prncple, a correcton should be ntroduced usng nformaton about the domestc frms that exted the ndustry. However, we do not have nformaton about these frms. Also, because of unpredctable competton effects, t s dffcult to antcpate the drecton of the possble bas arsng from the absence of data about these non-survvng frms. 13

15 4. Emprcal Results: The Magntude and Determnants of FDI-related Spllovers: Ths secton estmates the spllover effects n manufacturng n Argentna usng a number of dfferent specfcatons. It s dvded nto two parts. In the frst (Secton 4.1), we follow the hstorcal sequence of methodologcal approaches used n prevous research, testng the frst two hypotheses ndcated earler. In Secton 4.2 we test the thrd hypothess, usng a range of estmatons ncorporatng varables reflectng dfferent aspects of locally drven knowledge-creaton and accumulaton n MNC subsdares. We demonstrate the heterogenety of that technologcal behavour n Secton 4.2.1, and estmate ts sgnfcance n generatng spllover effects n Secton Results wth Prevous Methodologcal Approaches The results of the frst estmaton (Table 1) are derved from a specfcaton smlar to that used n most of the early work on spllovers n whch t s assumed that FDI generates spllover effects wthout dfferentatng between the technologcal behavour of dfferent subsdares or domestc frms. In ths case, our estmaton usng equaton 1- provdes a non-sgnfcant coeffcent for the FDI varable. Thus, n common wth other studes (especally of ndustralsng economes) the process of nternatonal knowledge dffuson va FDI does not appear to have delvered to Argentna durng ths perod the spllover effects expected by the centrally drven, supply-sde ( ppelne ) model. Table 1: Estmates Va the Conventonal Model Estmaton n frst dfferences TECHNOLOGICAL SPILLOVERS 0.24 (0.74) R 2 (adjusted) 46% Observatons 1033 Source: Authors calculatons based on the Argentnean Innovaton Survey Notes: 1 Not sgnfcant at the 10 per cent level; standard error n parenthess 2 For brevty we show only the coeffcents and sgnfcance levels for the FDI varable n the estmaton models. The coeffcents and sgnfcance levels for all the other varables are avalable on request from the authors. We therefore turn to the second hypothess, examnng whether these results arse because we faled to take account of the ablty of domestc frms to absorb the subsdares superor technology whch, accordng to the underlyng model at least, must have been avalable to domestc frms. In Table 2 domestc frms are dvded nto two groups wth hgh and low levels of absorptve capablty. These were defned n terms of the dstrbuton of, frst, the composte ndex of absorptve capabltes (Row 1) and second, each of the separate capablty ndcators (Rows 2.1 to 4.3). FDIrelated spllovers were calculated for each group and each capablty ndcator. 14

16 Table 2: FDI Spllovers and the Absorptve Capablty of Domestc Frms 1 When the domestc frms absorptve capabltes were defned as Hgh and Low wth respect to the followng: Sgn and sgnfcance of the estmaton of FDI spllovers for domestc frms when ther absorptve capabltes were: 1 Hgh Co-effcent for FDI and t values R 2 and Number of Observatons Low Co-effcent for FDI and t values R 2 and Number of Observatons 1 COMPOSITE INDEX OF ABSORPTIVE CAPABILITIES (0.16) 39% (560) 0.53 (0.72) 34% (559) 2 INVESTMENT IN DISEMBODIED TECHNOLOGY 2.1 R&D INTENSITY (0.13) 48% (342) 0.76 (1.36) 44% (767) 2.2 SKILL TRAINING INTENSITY (0.73) 49% (365) 0.72 (1.33) 43% (744) 2.3 SKILL INTENSITY OF EMPLOYMENT 0.77 (1.09) 45% (560) 0.25 (0.79) 43% (539) 3 INVESTMENT IN CAPITAL-EMBODIED TECHNOLOGY 3.1 INVESTMENT IN INFORMATION TECHNOLOGIES 0.81 (1.75)* 45% (628) 0.39 (0.54) 45% (481) 3.2 INVESTMENT IN EQUIPMENT FOR INNOVATION (1.44) 45% (398) 0.48 (0.77) 45% (711) 3.3 INVESTMENT IN IMPORTED CAPITAL GOODS 0.55 (1.74)* 57% (447) 0.5 (0.82) 38% (662) 4 INNOVATION STRATEGY 4.1 IMPORTANCE OF SIGNIFICANT PRODUCT INNOVATION (0.22) 45% (522) 0.84 (1.35) 43% (587) 4.2 IMPORTANCE OF SIGNIFICANT PROCESS INNOVATION 0.32 (0.77) 43% (485) 0.8 (1.22) 43% (624) 4.3 IMPORTANCE OF INNOVATION IN FIRM STRATEGY 0.1(0.22) 48% (350) 0.85 (1.53) 42% (759) Source: Own calculatons based on the Argentnean Innovaton Survey Notes: 1 All standard errors, n brackets, are corrected for heteroskedastcty. *sgnfcant at 10% level, **sgnfcant at 5% level and *** sgnfcant at 1% level. 2 Usng factor analyss, three ndexes of absorptve capabltes were obtaned. Here we show the results for the frst. Results for the second and thrd were also not sgnfcant. The frst factor s explaned mostly by three varables, nvestment n equpment for nnovaton, payments for lcences and mports of captal goods (see Annex 2 for more detals) 3 In senstvty tests a postve and sgnfcant coeffcent s obtaned f we consder only the top 10% (137) of domestc frms 4 In senstvty tests a postve and sgnfcant coeffcent s obtaned f we nclude the top 25% (344) of domestc frms 15

17 In ths way, the only sgnfcant assocatons between the productvty growth of domestc frms and the growth of FDI arse when domestc frms nvest relatvely heavly n captal-emboded technology. It s dffcult therefore to glean from these results a pcture that the dffuson of superor knowledge from MNC subsdares n Argentna made a sgnfcant contrbuton to productvty growth n domestc frms when the latter had absorptve capabltes to capture potentally avalable spllovers. Consequently we now abandon the core assumptons of the centrally drven supply-sde model. We wll no longer presume that MNC subsdares are homogeneous n offerng to domestc frms n host economes flows of potentally absorbable, superor technology orgnally transferred from ther parent companes. Instead, we turn to the thrd hypothess, examnng whether subsdares own knowledge-creatng and knowledge-accumulatng actvtes played any role n generatng spllover effects. 4.2 A Locally Drven Supply-Sde Model We frst examne (Secton 4.2.1) subsdares technologcal actvtes on ther own, demonstratng that they vary sgnfcantly between subsdares. We also show that ths varaton s not merely an ssue of nter-ndustry dfferences. We then estmate the sgnfcance of ths heterogenety n explanng spllovers (Secton 4.2.2) The Technologcal Actvtes of MNC Subsdares Table 3 shows how subsdares behaved wth respect to nvestment n dsemboded and captalemboded technologes. The wde heterogenety of behavour s strkng. Wth respect to R&D expendture, for nstance, one quartle of the subsdares spent the equvalent of 13.5 per cent of ther total sales on R&D but, at the other extreme, the frst quartle dd not nvest anythng at all n R&D. Smlarly, the top quartle ncreased ther R&D expendture by 0.55 per unt ncrease n total sales, but the bottom quartle decreased ther nvestment by a larger amount wth smlar growth n sales. The same heterogenety can also be observed wth respect to the other nvestments n dsemboded technologes and the subsdares nvestment n dfferent categores of captal emboded technology. 30 The wde dversty n subsdares technologcal behavour suggests there s at least an ssue here to examne. It seems hghly unlkely that the potental for generatng spllover effects s smlar across all these dfferent types of behavour. 16

18 Table 3: Subsdares Technologcal Behavour Indcators of Local Technologcal Behavour 1-Investment n dsemboded technology Subsdary Quartles Frst Second Thrd Fourth R&D ntensty - Level (Expendture as a proporton of total sales) 0% 0.1% 1.1% 13.5% - Change (ncrease n R&D per unt ncrease n sales) Tranng ntensty - Level (Expendtures as a proporton of total sales) 0.1% 0.2% 0.5% 17.9% Professonal workers n producton - Level (Number as a proporton of total employment) 1% 5% 10% 41% - Change (Increase n number per unt ncrease n employment) Investment n captal-emboded technology Investment n Informaton Technologes - Level (Expendture as a proporton of total sales) 0% 0.1% 0.2% 1.2% Investment n Equpment for Innovaton - Level (Expendture as a proporton of total sales) 0% 0% 1.1% 17.6% - Change (Increase n expendture per unt ncrease n sales) Investment n Imported Captal Goods - Level (Expendture as a proporton of total sales) 0.2% 0.9% 1.8% 18.3% - Change (Increase n expendture per unt ncrease n sales) Source: Authors calculatons based on the Argentnean Innovaton Survey. As some studes have suggested (see Secton 2.1c), however, t s possble that ths heterogenety merely reflects nherent dfferences n the technology-ntensty of ndustres, rather than ntrandustry dfferences n the technologcal behavour of subsdares. We therefore examne n two ways whether the technologcal ntensty of ndustres determnes subsdares behavour. Frst, we regress each ndcator of the subsdares nvestment n dsemboded and captal emboded technology aganst a classfcaton of the technologcal ntensty of ndustres n Latn Amerca, 31 controllng for the scale of the subsdares n terms of sales or employment. Second we used a ch square test to analyse whether the ndcators of varous aspects of the subsdares nnovaton strategy were ndependent of the technologcal ntensty of ndustres. The results (Table 4) suggest that ndustres are not the prmary source of varablty for the local technology behavour of subsdares. Indeed, the technologcal ntensty of ndustres only affects sgnfcantly (and n the expected drecton) subsdares expendtures on tranng. For all the other varables the effect s ether non-sgnfcant or operates n the opposte drecton - as wth the 30 And also, wth respect to the emphass on nnovaton n ther strategy, although we do not show the data here. 31 Ths classfcaton, developed by Ferraz et al. (1997), allocates all the 4-dgt manufacturng ndustres (SIC codes) nto fve broad categores. The taxonomy s smlar n prncple to the OECD and other classfcatons of ndustres n terms of ther technology-ntensty. However, recognsng that the same ndustry codes may ncorporate very dfferent technologcal characterstcs n dfferent economc contexts, t was developed to dfferentate ndustres n the partcular context of Latn Amerca. The categores and example ndustres are shown n Annex V. 17

19 ndcators of nvestments n captal emboded technology. We conclude therefore that varaton on subsdares technologcal behavour should be more extensvely explored as a supply-sde source of spllovers. Table 4: The Technologcal Intensty of Industres and the Technologcal Behavour of Subsdares Aspects of the Technologcal Behavour of Subsdares a Sgnfcance of the Technologcal Intensty of Industres n Explanng Dfferences n Aspects of Subsdares Technology Behavour Investment n Dsemboded Technology R&D Intensty: Level Not sgnfcant R&D Intensty: Change Not sgnfcant Tranng Intensty: Level Sgnfcant (+) Employment of professonal workers: Level Not sgnfcant Employment of professonal workers: Change Not sgnfcant R&D employees: Level Not sgnfcant R&D employees: Change Not sgnfcant Investment n Captal-Emboded Technology Investment n nformaton technologes: Level Not Sgnfcant Investment n Equpment for nnovaton: Level Sgnfcant (-) Investment n Equpment for nnovaton: Change Sgnfcant (-) Investment n mported captal goods: Level Sgnfcant (-) Investment n mported captal goods: Change Sgnfcant (-) Innovaton Strategy b Importance of Sgnfcant product nnovaton Importance of Sgnfcant process nnovaton Importance of nnovaton n overall strategy Independent Independent Independent Source: Authors calculatons based on the Argentnean Innovaton Survey Notes: (a) All varables n levels are ntroduced n ther natural logs (b) The Ferraz categores were re-ordered nto two groups (1+2+3 and 4+5+6) and three (1+2; 3; and 4+5+6) n order to test for ndependence. In both cases all tests do not reject the hypothess of ndependence Locally-Drven Supply-Sde Influences on Spllovers Table 5 shows the sgn and sgnfcance of technology spllovers for two types of domestc frms: (a) those located n 5-dgt ndustres where foregn subsdares are technologcally actve wth respect to the ndcators n the rows, and (b) those located n ndustres where subsdares are technologcally passve wth respect to the same ndcators. 32 It s strkng that there are sgnfcant results wth approprate sgns for a large number of the ndcators, ncludng the composte ndex. 32 It s mportant to note that subsdares that are technologcally actve wth respect to one ndcator (e.g. R&D ntensty) wll not necessarly be actve wth respect to others. Therefore the sectors ncluded n each group, and consequently the domestc frms ntroduced, may dffer between the ndcators. 18

20 Table 5: FDI Spllovers and MNC Subsdares Local Knowledge-Creaton and Accumulaton When the sectors are classfed as technologcally actve or passve wth respect to the followng aspects of the technologcal behavour of subsdares: Sgn and sgnfcance of the estmaton of FDI spllovers for domestc frms n sectors where subsdares are: 1 Co-effcent for FDI and t values Technologcally Actve R 2 and number of Observatons Co-effcent for FDI and t values Technologcally Passve R 2 and number of Observatons 1 COMPOSITE INDEX OF TECHNOLOGICAL BEHAVIOUR (2.01)** 37% (567) (-1.95) 38% (542) 2 INVESTMENT IN DISEMBODIED TECHNOLOGY 2.1 R&D INTENSITY (1.48) 45% (493) -0.09(-0.17) 46% (616) 2.2 SKILL TRAINING INTENSITY 1.58 (2.23)** 54% (236) (-1.12) 49% (617) 2.3 THE SKILL INTENSITY OF EMPLOYMENT (2)** 45% (492) (-0.74)* 51% (604) 3 INVESTMENT IN CAPITAL-EMBODIED TECHNOLOGY 3.1 INVESTMENT IN INFORMATION TECHNOLOGIES 1.22 (1.88)* 46% (474) (0.38) 46% (635) 3.2 INVESTMENT IN EQUIPMENT FOR INNOVATION 1.16 (1.71)* 44% (456) (-0.33) 47% (653) 3.3 INVESTMENT IN IMPORTED CAPITAL GOODS 1.06 (1.91)** 45% (507) (-1.69)* 46% (602) 4 INNOVATION STRATEGY 4.1 IMPORTANCE OF SIGNIFICANT PRODUCT INNOVATION 0.81 (1.65)* 44% (706) (-0.35) 52% (403) 4.2 IMPORTANCE OF SIGNIFICANT PROCESS INNOVATION 0.79 (1.59) 44% (706) (-0.23) 51% (403) 4.3 IMPORTANCE OF INNOVATION IN FIRM STRATEGY 0.92 (1.71)* 46% (598) 0.02 (0.04) 46% (511) Source: Authors calculatons based on the Argentnean Innovaton Survey Notes: 1 2 All standard errors, n parenthess, are corrected for heteroskedastcty. *sgnfcant at 10% level, **sgnfcant at 5% level and *** sgnfcant at 1% level. Usng factor analyss three ndexes of technologcal behavour were used. Here we show the results for the frst. The second and thrd provded non-sgnfcant results. Ths frst factor s explaned mostly by four varables, R&D expendtures, sklls, nvestments n equpment for nnovatons, and mports of captal goods (for more detals see Annex 2) 3 In senstvty tests a postve and sgnfcant coeffcent for FDIpart (5% level) s obtaned f only the top quartle of domestc frms (227) s selected. 4 In senstvty tests a postve and very sgnfcant coeffcent for FDIpart (1% level) s obtaned f only 10% of domestc frms s selected. 19

21 For nstance, tranng actvtes carred out by subsdares seem to be an mportant local drver for technology spllovers. The 236 domestc frms located n ndustres where subsdares have relatvely hgh expendture on tranng experenced postve and sgnfcant spllovers. In contrast, the other group of domestc frms, located n ndustres where subsdares spent lttle on tranng, experenced fallng productvty ( negatve spllovers ), 33 though ths result s not sgnfcant. The same relatonshps hold wth respect to the skll-ntensty of employment. When foregn frms employ hgh proportons of professonal and sklled workers, spllovers to domestc frms are postve and sgnfcant; but when ths proporton s low there s agan a fall n domestc frms productvty, and the relatonshp s sgnfcant. It s of nterest to note that, among the ndcators of nvestment n dsemboded technology, t s only subsdares expendture on R&D that seems to have no nfluence on the transmsson of spllovers though a postve and sgnfcant effect s found f only the top quartle of the dstrbuton of domestc frms s selected. Wth respect to all three ndcators of nvestment n captal-emboded technology, hgh levels of subsdary nvestment are postvely and sgnfcantly assocated wth spllovers to domestc frms. It also seems clear that the strategc mportance attached to nnovaton by subsdares nfluences the extent to whch spllovers are transmtted. In summary, there s a sharp contrast between the two types of approach we have taken to the estmaton of spllovers. The methods we used n Secton 4.1, based on underlyng models of a process that s centrally drven by the transfer of technology from parent frms yelded no evdence of spllover effects.e. we dd not confrm Hypothess 1. Ths changed very lttle when that model was augmented by consderaton of the absorptve capablty of domestc frms.e. we dd not confrm Hypothess 2. On the other hand, when we tested n ths secton a battery of models ncorporatng measures of localsed knowledge-creaton and knowledge accumulaton by MNC subsdares (Hypothess 3) an array of strong, postve and sgnfcant results was generated. 5. Conclusons One broad concluson to be drawn from these results s about the role of absorptve capabltes. Havng faled to dentfy spllovers delvered automatcally by FDI, we explored whether absorptve capabltes were an mportant nfluence on the extent of spllovers. The analyss suggested that, on ther own, they were not, so addng to the body of smlar results from other studes n ndustralsng 33 Snce real spllovers cannot be negatve, ths nverse relatonshp between FDI expanson and domestc frms productvty probably reflects some form of negatve effect of ncreased competton from FDI. 20