Thinking locally: A subsidiary centred model of FDI-related spillovers
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Governments in developing (and developed) countries spend large sums to attract foreign companies (e.g. $300,000 per job created in Brazil). But there is only one welfare justification for subsidizing MNCs: that they generate spillover effects. Yet, most of the empirical literature has not identified the expected spillovers or explained why they do not appear to occur (Smeets, 2008, Jarovick, 2004). I argue that this is because of a mismatch between the key assumptions underlying the conventional model used to estimate spillover effects and recent theorizing about how MNCs operate. Then, I propose an alternative approach. In this alternative the accumulation of technological assets and capacities by MNC’s subsidiaries in the host economy, is the main driver of spillover effects in association with FDI. This contrasts with conventional approaches which presume that spillovers arise exclusively in association with technological assets created by MNC's in central locations. The paper sumarises the empirical evidence in support of the alternative model proposed here and outlines some of the key theoretical and policy implications of this new way of conceptualizing spill over effects.