Technology Gaps, Absorptive Capacity and the Impact of Inward Investments on Productivity of European firms

Antonello Zanfei, University of Urbino
Davide Castellani, University of Perugia

Abstract

Using a balanced panel of firm-level data on the manufacturing industry in France, Italy and Spain over the

1992–1997 period, this paper examines the impact of foreign presence on the productivity of domestic enterprises. We find positive and significant externalities on Italian firms, negative impact on Spanish firms, and non-significant effects on French firms. A generalisation of the results obtained for individual countries is attempted by introducing productivity gaps between foreign and domestic firms, and absorptive capacity of domestic firms. It

is shown that high gaps tend to favour positive effects of FDI, while absorptive capacity, measured by local firms’

average productivity levels, does not leverage productivity spillovers from FDI. This would confirm the ‘‘catching up’’ hypothesis, which identifies a positive relation between the size of technological gaps and growth opportunities induced by foreign investments, and would contradict the ‘‘technological accumulation’’ hypothesis, which stresses the role of domestic absorptive capacity and of coherence between foreign and domestic technology as determinants of virtuous effects of inward investments.

JEL: F23, L23