Creating Backward Linkages from Multinationals: Is There a Role for Financial Incentives?

Abstract:     
We investigate whether government subsidies encourage foreign multinationals to create linkages with domestic suppliers. To this end we use a unique panel dataset of foreign multinationals located in Ireland for which we have exhaustive information on grant receipt. Our results indicate that while European and US foreign plants develop backward linkages independently of grant receipt, multinationals from other parts of the world respond positively to government support. Our results hold even when controlling for the possible endogeneity of grants and the boundedness of the linkage variable. We conclude that governments should not apply a one-size-fits-all approach to incentivizing foreign multinationals.

Number of Pages in PDF File: 15

Accepted Paper Series