Linking corporate productivity to foreign direct investment: An empirical assessment § Nata ´ lia Barbosa *, Vasco Eiriz University of Minho, School of Economics and Management, Gualtar, 4710-057 Braga, Portugal 1. Introduction Attracting foreign direct investment (FDI) has become a key factor of the national development strategies of many countries. Policymakers tend to claim that FDI generates economic externalities. The policy agenda in many countries emphasises the need to attract FDI as a means to access capital, new technologies, know-how, and other resources (e.g., access to distribution channels) on the grounds that these resources may improve domestic productivity. The rationale for that relies on there being some form of market failure, namely in the form of an externality. Theory identifies a range of possible channels by which foreign firms can affect either the level or growth rate of domestic productivity. Foreign firms may boost technology transfer because domestic firms may try to imitate the technology used by foreign firms more easily once the foreign firm is located in the domestic market. The relevance of this effect is nonetheless limited by domestic firms’ absorptive capacity in terms of capturing knowledge spillovers and by the time required to develop them (see Blomstro ¨ m & Kokko, 1998; Go ¨ rg & Greenaway, 2004, for a survey). This argument suggests that firms belonging to industries that have a significant foreign presence should display higher levels of productivity. International Business Review 18 (2009) 1–13 ARTICLE INFO Article history: Received 12 January 2006 Received in revised form 22 September 2008 Accepted 22 October 2008 JEL classification: F23 O30 C33 L6 Keywords: FDI GMM Manufacturing industry Panel data Vertical and horizontal spillovers ABSTRACT This paper examines whether foreign firms generate productivity spillovers. Despite the relevance of this question to public policy, previous studies have failed to find consistent and conclusive evidence to support the existence of positive spillovers. Using previously unexploited firm-level data over the 1994–1999 period, we attempt to contribute to the literature on productivity spillovers from FDI by analysing the Portuguese manufacturing industry. The results indicate that foreign firms in the same industry of the observed firms (horizontal spillovers) and linkages between foreign firms and their local suppliers or customers (vertical spillovers) do not impact significantly on firms’ productivity. Moreover, we detected no differences on productivity spillovers associated to firm- specific characteristics. ß 2009 Elsevier Ltd. All rights reserved. § The authors wish to thank the Portuguese Foundation for Science and Technology (FCT) for funding the project ‘‘Firms’ heterogeneous capabilities and industrial dynamics’’ under research grant POCI/EGE/56937/2004 (partially funded by FEDER). * Corresponding author. Tel.: +351 253 604 535; fax: +351 253 601 380. E-mail address: natbar@eeg.uminho.pt (N. Barbosa). Contents lists available at ScienceDirect International Business Review journal homepage: www.elsevier.com/locate/ibusrev 0969-5931/$ – see front matter ß 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.ibusrev.2008.10.003