Knowledge spillovers through multinational firms in high-tech and low-tech industries

Abstract

Although economists and policy makers have devoted considerable attention to technology spillovers from multinational firms to domestic firms, they have yet to come to a common conclusion. In order to reach a deeper understanding of complex FDI knowledge spillovers, this study disaggregates total spillovers into those in high- and low-tech industries. I develop a simple theory to explain the mechanism through which new technology of foreign firms is transmitted to domestic firms by analyzing multinational firms’ endogenous decisions on from where to procure intermediate goods. The model shows different patterns of knowledge spillovers in the high- and low-tech industries: immediate catch-up to foreign firms’ advanced technology but unsustainable technology spillovers in the low-tech sectors and, in contrast, slow catch-up to foreign firms’ technology but continual knowledge spillovers in the high-tech sectors. The U.S. data for the years 1987-1995, broken down into high- and low-tech industries, support the model.