The Importance of Clusters for Spillovers from Foreign Direct Investment and Technology Sourcing

Regional clusters are important sources ofcompetitiveness for localities; the externalities they generate triggerinnovation and learning. This study considers the importance of cluster effectsin determining the productivity spillovers from foreign direct investment (FDI)in the UK. It focuses on differences in productivity spillovers between foreignand domestically owned sectors of the economy. Using UK Office for National Statistics data, 297 UK clusters wereidentified. The Annual Production Inquiry and Office for National Statisticsprovided econometric data for foreign-owned and domestic-owned sectors covering1993-1998. Data were analyzed for foreign and domestic sectors within clusters,and foreign and domestic sectors outside clusters. The analysis tests for theimportance of clusters in determining spillover effects from FDI to and fromthe host country. Analysis shows that investment by domestic firms in clusters generates totalproductivity growth in inward investors within clusters. This is evidence oftechnology sourcing by foreign affiliates within UK clusters. UK investment atthe industry level generates productivity growth for foreign firms only wherethe multinational enterprise is located in or near a cluster. This is not thecase for foreign firms outside clusters. Therefore, the key distinction inpromoting externalities is not between foreign and domestic firms, but betweenclusters and regions without firm or sector clusters. (TNM)