The Impact of Foreign Mnes in Service Sectors on Productivity of Local Manufacturing Firms: Vertical Linkages and Spillovers

Abstract

This paper deals with forward and backward linkages stemming from foreign multinational enterprises (MNEs) in services sectors and their impact on the productivity of local manufacturing firms. We distinguish between pecuniary and technological spillovers. Using a database on foreign MNEs in service sectors in Italy, over the 1999-2005 period, we find that pecuniary spillovers positively influence local manufacturing firms through forward and backward linkages, provided that foreign MNEs contribute to increasing competition in the local relevant service sector. Likewise, technological spillovers impact local manufacturing firms according to the latter absorptive capacity and capabilities. We claim also that the foreign involvement of the local manufacturing firms acts as a moderating factor for the transmission of spillovers.

Keywords: MNE-Host country relations, FDI, Knowledge and productivity spillovers

JEL Classification: C23, D24, F23