The Effects of Foreign Direct Investment on the European Domestic Economy through Horizontal and Vertical Technology Spillovers

Abstract

I examine three types of technology spillovers (horizontal, backward, and forward) from foreign firms to domestic firms in five European countries between 2012 and 2016. Drawing from data on companies in the United Kingdom, the Netherlands, Germany, Ireland, and France with over 1.4 million observations, I study whether the presence of foreign firms in an industry corresponds to domestic firm productivity growth. I contribute to the literature by analyzing over seventy industries, moving beyond the narrow focus on manufacturing firms in existing literature, and using more measures of productivity than commonly explored. I also include a robustness check using novel indicators of technology spillover drawn from foreign shareholder data. I find robust evidence for significant positive horizontal and forward spillover effects in the countries and time frame in scope. The results hold when accounting for spillover effects only from US or OECD firms, as well as measuring spillover variables varying by firm characteristics and different definitions of foreign direct investment.