Technological trajectories and FDI : top bananas and underdogs

Previous empirical evidence searching for externalities from Foreign Direct investment in Portugal showed mixed results. Using a new database containing 5,045 Portuguese manufacturing firms grouped by technological trajectories, we investigate the occurrence and magnitude of externalities from FDI in 1995-2007. We find both positive and negative externalities in scale-intensive and supplier-dominated industries. The magnitude of externalities is higher in the current period than in lagged periods. Because positive externalities outweigh the negative externalities, on the whole a 1% increase in foreign presence (measured by turnover) increases the Total Factor Productivity of domestic firms by 0.42 percentage points. Thus, the Investment Promoting Agency should attract foreign projects in those technological groups.