The Gains from Foreign Direct Investment: Technology and Competition Spillovers in Uganda

Abstract

Is there in the aggregate an economic logic to attracting foreign direct investment (FDI)? This paper proposes a novel micro-level measure of technology and market competition spillovers. I combine this measure with firm, firm-to-firm, customs and employer-employee data on the universe of formal firms and workers in Uganda. Using an event study design, my results indicate that foreign entry reduces sales, wage expenditure, input purchases and employees at domestic firms. These effects become much larger when controlling for technology and competition spillovers, and wage expenditure effects turn positive. After accounting for network (indirect) effects, sales and input purchases actually experience positive growth, suggesting negative effects largely propagate through domestic production networks. Results suggest direct and indirect spillovers occur predominantly in the manufacturing sector.

Keywords: FDI, Spillovers

JEL Classification: F2, O14