New and Improved: Does FDI Boost Production Complexity in Host Countries?

Abstract

This paper examines the relationship between the presence of foreign affiliates and product upgrading by Turkish manufacturing firms. The analysis suggests that Turkish firms in sectors and regions more likely to supply foreign affiliates tend to introduce more complex products, where complexity is captured using a measure developed by Hausmann and Hidalgo (2009). This finding is robust to controlling for omitted variables, sample selection and potential simultaneity bias. It is also in line with the view that inflows of foreign direct investment stimulate upgrading of indigenous production capabilities in host countries.

Keywords: Backward Linkages, FDI, Product Innovation, Production Upgrading, Turkey

JEL Classification: D22, F23, L20