The Determinants of Host Country Spillovers from Foreign Direct Investment: Review and Synthesis of the Literature

The existence of spillover efficiency benefits to host country economies from inward foreign direct investment (FDI) are well documented in the literature, particularly for economically developed host economies. The determinants of the size and scope of the spillover benefits have also been studied, but they are not as clearly and consistently documented as the existence and magnitude of the relevant externalities. Yet, a good understanding of the determinants of the nature and magnitude of FDI efficiency spillovers is of crucial importance to policymakers. The primary purpose of this paper is to review and synthesize the available literature focusing on the determinants of efficiency spillovers from inward FDI. In order to do so, we also outline a theoretical framework for understanding the underlying "supply" and "demand" forces determining the scope and magnitude of FDI spillovers to host economies. The findings suggest that the competitiveness of host country markets, proxied e.g. by the openness to imports, and the technical capability of local firms are among the most important determinants of spillover benefits. Both of these characteristics can be influenced by host country policy. However, it is difficult provide unequivocal policy advice on the basis of these findings, since some of the policies that maximize the potential spillovers from a given "pool" of appropriable technology (such as technology transfer requirements or active competition policies) may actually reduce the attractiveness of the host country to some foreign investors.