Summary papers for research

Paper 1 - Productivity Spillovers from foreign multinational enterprises to domestic

manufacturing firms: to what extent does spatial proximity matter?

This paper analyses the role of spatial proximity in productivity spillovers from foreign multinational
enterprises (MNEs).

Main points introduction

- Evidence has shown that international firms are more efficient and productive than domestic
firms. Multinational enterprises may generate productivity spillovers via several interaction
mechanisms (look at these mechanisms).
- the effects of foreign affiliates on local companies have generally been assessed by the
productivity levels of the latter, and the concept of productivity spillovers has been
increasingly adopted (JAVORCIK, 2004). Most of the literature has investigated productivity
spillovers of foreign affiliates in manufacturing sectors (I will do the same depending on the
dataset)
- Paper uses a lot of literature regarding the importance of proximity --) (e.g.,
AUTANTBERNARD, 2001; IVARSSON and ALVSTAM, 2005).
- Uses a panel dataset of foreign affiliates in Italy from 1999 to 2005, considering those in the
service industries that are most likely to generate productivity spillovers and MNE’s in 23
manufacturing industries.
- Spillover effects on local firms have been modeled and estimated as a relationship between
their total factor productivity (TFP) and the presence of foreign affiliates in the
aforementioned sectors, weighted by the relevant input-output (IO) technical coefficients
- One of the main points the paper makes --) spatial proximity and colocation contribute
modestly to the benefits captured by local domestic suppliers and customers and that this is
particularly true of spillovers from foreign affiliates in the service sector.

Main points literature review

- Previous studies reveal that both intra-industry and inter-industry spillovers from foreign
MNEs have an important regional dimension (e.g., DÖRING and SCHNELLENBACH, 2006;
DRIFFIELD, 2006).
- the idea is that the intensity of the effects of foreign MNEs on local firms decreases
with geographical distance, as distance is expected to reduce the likelihood of face-
to-face and inter-organizational interactions and the effective transmission of
knowledge.
- However, some recent studies of proximity argue that co-location does not ensure
interaction. Geographical proximity is neither a necessary nor a sufficient condition for
learning to take place. Organizational proximity for instance has a crucial role in facilitating
mutual understanding, effective communication and the transfer of tacit know-how.
- Additionally, spatial proximity may play different roles in the manufacturing and the service
sectors. Spillovers from MNEs in the service sector rely less on geographical proximity,
Main points econometric model

Regress the productivity of local manufacturing firms on the presence of foreign MNEs in
manufacturing industries and the presence of foreign MNEs in service industries. Relationships are
tested by taking spatial proximity and co-location into account.

- Paper follows an approached adopted in recent empirical studies (e.g., JAVORCIK, 2004;
BLALOCK and GERTLER, 2009) that examined the effects of foreign affiliates on local firms by
regression total factor productivity on local firms on the presence of MNEs. TFP --) is an
indicator of a firm’s overall relative efficiency. This is the dependent variable.
- One of the explanatory variables is the presence of foreign MNEs, measured by the number
of local operating units. In order to account for the moderating effects of linkages, the
presence of foreign affiliates is weighted by the input-output (IO) coefficients among
industries.
- Co-location and spatial lags --) To investigate the role of colocation and spatial proximity in
the transmission of productivity spillovers, this section disentangles the variable proxying for
the presence of foreign affiliates in the same location as the local firm from the variable
proxying for the presence of foreign affiliates in bordering locations.

Main points discussion and conclusion

- it is found that spatial proximity is not necessary for local companies to benefit from foreign
MNEs, spatial proximity is even less relevant in the case of service MNEs.
- This paper contributes to the literature in several ways. Until now, few studies have
disentangled the vertical linkage effects associated with the entry of foreign MNEs. Look at
the other papers mentioned after this.
- Finally, although the present exercise focuses on a developed country – Italy – the results
obtained are also of the utmost importance for developing countries

Important notes

- The paper has several interesting findings regarding the presence of MNEs and the
productivity. The paper mentioned a lot of other relevant papers regarding the same topic in
the literature review part, which definitely look at these.
- However, I believe that the econometric method used in the paper would be too hard to
replicate, especially because of the backwards and forward linkages. I have my doubts about
whether the dataset would be suitable for this method.
- I think that looking at total factor productivity would be a really good idea.

Potential research question

Do local manufacturing firms (domestic ownership of small to medium sized firms) experience
knowledge spillovers from large multinational manufacturing firms in Indonesia. Do small domestic
firms located in closer proximity to the large MNE’s have higher productivity.

Additionally, it is found that spatial proximity is not necessary for local companies to benefit from
foreign MNEs. (dataset of foreign affiliates in Italy from 1999 to 2005).
 - Could distinguish between domestic firms that export to other countries and those that
don’t. Also make a distinction between overall productivity as a whole over the sector and
looking at individual firms (non export vs export firms).
- Dreimeier et all. Found a striking pattern: the extent of openness and the competitivennes of
markets affects the relative productivity of firms across the region. Firms with foreign
ownership and firms that export are significantly more productive, and the productivity gap
is larger the less developed is the local market.

Paper 2 - Geography of  productivity: evidence from  China’s manufacturing industries

This paper builds on previous studies on why locational agglomeration is associated with
productivity benefits.

Main points introduction

- The importance of factor productivity as a driving force of regional inequality has been
largely overlooked. Firms in industrial clusters and large cities are often more productive
than those located elsewhere, this has long been explained by agglomeration externalities
that impact firm performance.
- Agglomeration externalities, however, are only one reason for regional disparity in
productivity. One key component of the agglomeration process is the spatial sorting of
heterogeneous firms to locate in regions with specific characteristics. High productivity frms
may ex ante sort into large cities and industrial clusters, since they benefit more from
agglomeration than do their low-productivity counterparts
- Another mechanism of regional inequalities in production is selection. That is, in large cities
and clusters, intensification of competition shakes out low-productivity firms, and
consequently only high-productivity firms may survive.

Main points conclusion

- This paper looks at the possibility of adverse sorting, whereby high-productivity firms may be
less likely to sort into large cities and clusters. This adverse sorting effect is much more
prevalent in the case of intra-industry agglomeration externalities.
- Spatial sorting effect prevails in most industries, while adverse sorting efect is much more
dominant in technology-intensive
Paper 3 – Does spatial proximity raise firm productivity? Evidence from British manufacturing

Paper researches the extent of spatial concentration and its impact on total factor productivity in
advanced manufacturing sectors in Great Britain. The results from estimation of production
functions indicate that, in most advanced manufacturing sectors, spatial concentration has a
negative impact on productivity in small plants and a positive effect in larger plants.

Main points introduction

- According to the UK government clustering is viewed as beneficial to firms (particularly to

small firms) because they can access a shared pool of expertise and labor, suppliers, and
information or contacts. However, there is the question of how much empirical support
there actually is that firms that co-locate benefit.
- In the innovation literature, it has been argued that spatial proximity per se does not always
raise interactive learning and innovation, In some cases, spatial proximity does not lead to
the formation of inter-linked and collaborative clusters of firms, and in other cases it may
actually restrict and constrain firm learning.
- Therefore, the authors aim in this article was to test how far spatial proximity raises firm
productivity in the case of knowledge intensive British manufacturing.
- To examine the effects of different degrees of spatial co-location, we construct a spatial
proximity index that measures the proximity of each plant to every other plant within the
same industry, and then use this to test if plants with high values of the index (a high degree
of spatial concentration) have higher TFP.
- They found that the productivity benefits from spatial proximity are by no means universal,
and in many cases only exist for larger plants (with sufficient absorptive capacity).

Main points methodology, analysis, and literature review

- Porter (1996) --) clusters raise the productivity of firms primarily through dynamic
externalities related to learning, rather than by static cost-reducing externalities.
- Three processes of agglomeration benefits --) common pool of resources, probability, and
speed of matching increases, diffusion and accumulation of knowledge is expected to be
better.
- It is possible that industry clusters benefit from all three of these processes, however
providing an empirical assessment of this possibility is much more challenging.
- The distinction between intra- and inter-industry spillovers is somewhat blurred if related
industries are classified as part of a cluster (are clusters consisting of multiple industries or
only one industry). The authors define this as related spillovers.
- Empirical evidence on whether spatial proximity does act to raise firm productivity is not as
strong as either cluster theory or agglomeration theory would lead us to expect. Robust
empirical studies are relatively scarce. While some studies provide some evidence in favor of
the benefits of co-location externalities, the magnitude of the effects is generally small.
- Attempts to estimate the productivity benefits of spatial proximity also encounter
significant endogeneity problems.
- Finally, a key response to the mixed and varied results of research on cluster and localization
spillovers has been to pay much more attention to firm heterogeneity. There is mounting
evidence that differences in firm characteristics mean that while some benefit from spatial
 proximity, other firms may gain no advantage, or even be disadvantaged by such a location
(Knoben et al., 2016)
- Rigby and Brown (2015) report that smaller and younger firm benefit most from
knowledge spillovers within a radius of 5 km but that older benefit from having
upstream suppliers nearby.
- Some authors argue that smaller firms tend to benefit more from co-location as such
firms are more dependent on local sources for inputs, knowledge and collective
capabilities.
- However absorptive capacity plays a key role in these processes. Harris and Yan
(2019) conclude that firms will not fully benefit from external knowledge unless they
have sufficient absorptive capacity. There is heterogeneity regarding the absorptive
capabilities of firms.
- This article examines the relationship between co-location (with other firms in the same
industry and related industries), productivity and plant size in detail.
- First step in the econometric model was estimation of Cobb-Douglas log-linear production
functions, for each of the six manufacturing sectors.
- This article uses an interesting way to measure the extent to which a plant is ‘co-located
with other plants in the same four-digit industry or plants in related four-digit industries. The
higher the distance value, the more a plant is located in spatial proximity to other plants in
the same industry. The authors use thee levels of decay --) low, medium and high.

Review of the literature --) two different accounts or interpretations of the beneficial roles that
spatial proximity is assumed to confer on firms, by improving their growth and productivity. The first
one is Porter’s cluster theory, and the second account is the agglomeration argument.
Agglomeration is assumed to produce Jacobsian externalities that boost the economic performance
of the local firms in the agglomeration. Spatial proximity of firms is viewed as a key driver of firm
growth and performance in both concepts.

Main points conclusion

- Assumption --) clustering increases both the productivity of plants, and by implication, the
overall productivity and performance of the wider geographical area, the region in which the
cluster is situated.
- The novelty of the author’s approach in this article is that they tested for the impact of varying
degrees of spatial proximity in six advanced manufacturing sectors (at four-digit SIC level) and in
wider sets of related industries, allowing different rates of decay in the impact of distance on co-
located plants.
- They find that positive impacts of spatial proximity on firm productivity are by no means
universal, and in all but two sectors the benefits appear to be significant only for larger plants
(which presumably have the sufficient absorptive capacity to take advantage of inter-firm
spillovers and other such externalities).
Paper 4 – Spillovers from multinationals to heterogeneous domestic firms: evidence from Hungary

Main points introduction

- FDI is often seen as a catalyst for development by many governments because it increases
domestic firms’ productivity by creating linkages between multinational and domestic firms.
The empirical literature on FDI spillovers, however, finds mixed support concerning the
impact of spillovers on domestic firms’ total factor productivity.
- Firms react to foreign presence in a rather heterogeneous manner, some domestic firms can
reap spillovers from multinationals but others may not.
- Authors argue that the impact of multinationals on domestic firms depends on the intensity
of linkage, domestic firms’ absorptive capacity, and their ability to face competition. The
extra competition from MNEs could raise process and product innovations or it could
decrease the market share of domestic firms.
- Aim is to analyze the different responses of heterogeneous domestic firms to the expansion
spread of multinational firm presence in Hungary.
- Uses a large and extensive dataset on Hungarian manufacturing firms. It contains
information on domestic and export sales and on the ownership structure of all firms. It also
allows the calculation of the TFP of each domestic firm (similar to the dataset available to
us).
- Assumption --) spillovers are generated only if the geographical distance between
multinational and domestic firms is small, as has been suggested by Audretsch and
Feldmann 1998. Also look at Halpeln and Murakozy (2007)

Responses to FDI spillovers main point (section) 2

Main points estimation strategy and discussion of results

Main points conclusion

- The presence of Multinationals in the same industry increases competition in goods and
factor markets and reduces the productivity of the least productive firms. More productive
firms benefit more from horizontal spillovers.
- There are no large spillovers for exporters than for non-exporting domestic firms (potential
research question?)
- Authors find that the most productive firms gain the most, while the least productive are
actually negatively affected by proximity to foreign firms. This supports the idea of an
absorptive capacity necessary to reap positive spillover effects.
- FDI may be beneficial for the economy but not all firms. Results reveal that FDI will only
improve the performance of firms that have already achieved a certain level of productivity.
FDI into less developed regions and industries is likely to have nor or even a negative impact.
 Paper 5 – Productivity spillovers from foreign MNEs on domestic manufacturing firms: is co-
location always a plus.

Main points introduction

- Fundamental idea: MNE are generally more efficient and productive than domestic firms --)
they might generate spillovers through several interaction mechanisms, both intra and inter-
industry
- Spillovers are said to take place when the entry or presence of MNE affiliates leads to higher
productivity for domestic local firms. The paper references (Smarzynska Javorcik, 2004).
- The bulk of the literature has investigated the presence of spillovers in manufacturing
sectors, few contributions have investigated spillovers stemming from the entry of foreign
MNEs in services on local economies
- The paper references a lot of papers that investigated the presence of spillovers in
manufacturing sectors, look at these!
- This paper focuses on spillovers to local manufacturing companies stemming from foreign
MNEs operating both in services and manufacturing.
- The impact upon local manufacturing firms has been modeled and estimated as a
relationship between their total factor productivity and the presence of foreign MNEs in the
several sectors considered, weighted by the relevant input-output technical coefficient. This
allows capturing spillovers induced by foreign MNEs taking into account the intensity of the
interactions they set with local firms.
- Results show that the relationship between local manufacturing companies TFP and the
presence of foreign MNEs is positive and significant across different sectors, meaning that
local manufacturing customers do generally benefit from spillovers.
- Effects are higher when local companies and foreign firms are co-located, co-location matter
most for foreign MNEs in manufacturing sectors, less relevant for those in service sectors.

Main point literature review

- Evidence about the positive impact of foreign MNEs upon productivity of local firms in
supplier and/or customer sector, which enjoy vertical linkages with MNEs, is rather
unanimous and robust across different countries (see the papers referenced)

Paper 6 – The spatial dimension in FDI spillovers: Evidence at the regional level from Portugal

Several reasons to expect that benefits to domestic firms from foreign direct investment would be
confined to the area where the multinational firm is located and that the benefits depend on the
development level of the host region. Data from this paper confirms the relevance of both the
geographical proximity and the development level of the region this phenomenon.

Main points introduction

- FDI is widely accepted to be an important element of the development strategy pursued by

most countries, due to several direct effects but also the to the possibility of domestic firms
to have access to more advanced and efficient technologies, thereby achieving greater
productivity.
 - Three fundamental strand can be identified in the research into FDI spillovers --) 1) only
intra-industry spillovers (positive effect), 2) intra & inter industry spillovers (non-significant
or negative effects),
- These findings led to a third line of analysis on FDI spillovers, based on the assumption that
spillover effects are probably not a universal occurrence. Determining factors that condition
the existence, sign and dimension of such effects. This paper follows the most recent of the
literature on FDI spillovers.

The present paper analyses the possible interaction between two of the determinant factors
mentioned above. The factors that are analysed: geographical proximity between MNEs and
domestic firms and the development level of the host region --) could do the same for my research.

- This paper seeks to answer two fundamental questions in the context of FDI spillovers
evaluation: 1) Is geographical proximity between MNCs and domestic firms of importance
for the occurrence of the effects? 2) Does the level of development in the host region
influence the occurrence of spillovers?
- The paper then present a brief description of the main channels through which the spillovers
effect can occur in favor of domestic firms. --) This also needs to be in my final paper.
- Blalock and Gertler (2008), observing the regional level for the Indonesian case, find
evidence that supports the existence of an intersector effect, but do not confirm the
existence of an intra-sector effect.

Main points about Portugal

- Dependent variable --) total value added divided by the number of workers --) aiming to
proxy the efficiency level of domestic firms.
- To test for the existence of FDI spillovers to domestic firms, we construct several variables
that capture the magnitude of the foreign presence. They measured the dimension of the
external presence through three variables defined at national level (FPN1, FPN2, FPN3) and
three others constructed at regional level (FPR1, FPR2 and FPR3).
- FPN1 --) capture the existence of intra-industry spillovers at the national level. It is
constructed as the weight of employment in the foreign firms in the total employment of the
sector where the firm i operates.
- The possible existence of inter-industry spillovers is analysed through the variables FPN2 and
FPN3. FPN2 --) evaluates the occurrence of inter-industry spillovers in the case in which
foreign firms supply local firms (forward linkages). FPN3 --) focuses on backward linkages
between foreign firms that are supplied by the local firms.
- The variables FPR1, FPR2 and FPR3 aim to capture the existence of a regional dimension in
FDI spillovers in the Portuguese case (in the context of regional geographical units).
- Besides the variables which intend to capture the dimension of the foreign presence, we
consider a group of control variables that may have influence on the efficiency level of the
domestic firms.
- The methods the authors use could be highly relevant for my paper

- The set of results displayed above reveal, on one hand, the importance of space as a
conditioning variable that is fundamental to the occurrence of spillovers. On the other hand,
these results suggest that the phenomenon of FDI spillovers is much more circumscript than
is commonly accepted.
 NOTE --) test for levels of education because that is highly correlated to the absorption level of
domestic firms. By investing in human capital, countries can improve their ability to identify,
value, assimilate and apply (or exploit) knowledge that is developed in other (more developed)
countries

Paper 7 – Does proximity to foreign invested firms stimulate productivity growth of domestic firms?
Firm level evidence from Vietnam

Studies the spatial component of spillover effects from foreign direct investment on total factor
productivity (TFP) of domestic manufacturing firms in Vietnam from 2005 to 2010.

Main points Introduction

- Foreign direct investment is seen as an important driver of technological progress in

particular for developing countries due to spillover effects from foreign firms on the
domestic industry.
- Paper lists several papers regarding the importance of localization of industries (should do
the same for mine introduction)
- This paper contributes to the literature by shedding more light on the relevance of spatial
proximity with regard to spillover effects from foreign invested firms on the local industries’
productivity growth.
- Our proposition is that proximity between foreign invested and domestic firms crucially
facilitates the know-how and technology transmission channels, and hence that geography
and the localisation of industry matters for spillover effects.
- Authorsos compute total factor productivity of firms from the parameters estimated by an
industry-specific production function method introduced by Levinsohn and Petrin (2003)
- Results affirm that spillover effects are indeed localized and quickly fade with increasing
distance (spillover effects seem to be strongest between 2 and 10 kilometers)
- Paper finds strong support in favor or relevant spillover effects from foreign investments on
the local SME sector (small and medium enterprises).

Main points related literature

- This part is divided into --) General results about FDI spillovers (papers about the importance
of FDI), what do papers say about intra-industry spillovers (Horizontal), what do papers say
about inter-industry spillovers (Vertical), what do papers say about spatial proximity, what
do papers say about MNE’s, FDI and spatial proximity in Indonesia. Should do the same thing
for my literature review.

Main points conclusion

- Spillovers are strongest within distances of 2 to 10 kilometres and fade out beyond.
- Our results indicate that spillover effects are in fact largest for small and relatively
unproductive firms.
Paper 8 – The effect of knowledge spillover on productivity: Evidence from the manufacturing
industry in Indonesia

Analyses the effect of knowledge spillover on productivity in the Indonesian manufacturing industry
from 2010 to 2014 using inter-sectoral linkages and inter-regional linkages.

Main points introduction

- Focus on how domestic/local industries can optimally absorb the knowledge (both tacit and
codified) adopt the technology, and incorporate them into their production methods or
processes.
- Inter-sectoral spillover: “technological knowledge possessed by one industry can spread to
other industries and increase the latter’s productivity through inter-industry trading of
intermediate goods.”
- This study is consistent with Sena (2004), who explains the channels of transmission through
which technological knowledge can spillover: that is (1) inter-industry and intra-industry
linkages; (2) inter-sectoral based vertical linkages or customer-supplier relationships
(forward linkage/downstream and backward linkage/upstream); (3) agglomeration-based
geographical proximity.
- The paper proposes three hypotheses:
- If knowledge spillover flows based on inter-industry and intra-industry linkages in a
vertical linkage (downstream and upstream) between suppliers and customers,
which of the two linkages is more dominant in the case of downstream or upstream
or both linkage(s)?
- if industrial-agglomeration-based geographic distance creates a productivity
spillover, is this an inter-regional spillover? What factors affect the externalities from
agglomeration in inter-regional and intra-regional spillover(s)?
- If there is a positive relationship between knowledge spillovers and absorptive
capacity, what is the nature of this relationship? What factors contribute positively
to its absorptive capacity?

Main points conclusion

- First, productivity spillover from intermediate goods transactions in vertical linkage

(customer-supplier) is dominated by inter-industry downstream and intra-industry
upstream. Therefore, the downstream spillover effect predominantly flows from customers
to suppliers through interindustry linkages, while the upstream spillover effect
predominantly flows from suppliers to customers through intra-industry linkage.
- Second, our findings suggest that foreign technology’s entry channel to domestic firms is
stronger through imported materials than foreign direct investment (FDI).
- Third, productivity spillover created from intra-regional spillover (within the region) is
stronger than the productivity spillover created from inter-regional spillover (between the
region), which implies that the shorter the geographic distance, the narrower the technology
gap. This implies that investment in new public capital in specific regions, such as
infrastructure and industrial-specific zones in the new-core region, will generate strong and
positive productivity spillover effects.
- Fourth, investment in human and physical capital (land, building, machinery, etc.) are
essential absorptive capacity factors for firms/industries/regions. This implies that both
investments narrow the technology gap between developing and advanced
firms/industries/regions as a precondition requirement to absorb technology
 - Fifth, knowledge spillover created from capital-intensive industries is higher than that of
labor-intensive industries. This implies that the Indonesian government has the right path to
boost sectoral labor productivity through the national program of Indonesia 4IR by
implementing digital technology 4.0 in the Indonesian manufacturing sector.

Blalock and Gertler (2008)

Draft proposal

Total factor productivity influenced by --) spatial proximity of domestic firms to MNEs, development
level of the host region (affects the absorptive capabilities of the region/firm to exploit potential
spillovers), variable regarding inter-industry spillovers, variable regarding intra-industry spillovers,
variable regarding export vs non-export firms (one paper found that there are no larger spillovers for
exporters than for non-exporting domestic firms), variable regarding size of firms (one paper found
evidence that larger plants benefit from spillovers more)

- Add any (potential) relevant variables as control variables

Introduction

- Background sketch about multinationals and spillovers they generate

- Discuss academic relevance (also consider social relevance)
- Present your research question --) how do you do it ( method & data)

Literature

- Systematic discussion of relevant literature (which may be concluded with a list of

hypotheses or conceptual model)
- Do not summarize all of the papers that you have read in this part

Method and data

- Formulation of your population model (regression model)

- Discuss which techniques needs to be used in order for testing the hypothesis