Thinking locally: A subsidiary centred model of FDI-related spillovers

Governments in developing (and developed) countries spend large sums to attract foreigncompanies (e.g. $300,000 per job created in Brazil). But there is only one welfarejustification for subsidizing MNCs: that they generate spillover effects. Yet, most of theempirical 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 amismatch between the key assumptions underlying the conventional model used toestimate spillover effects and recent theorizing about how MNCs operate. Then, Ipropose an alternative approach. In this alternative the accumulation of technologicalassets and capacities by MNC’s subsidiaries in the host economy, is the main driver ofspillover effects in association with FDI. This contrasts with conventional approacheswhich presume that spillovers arise exclusively in association with technological assetscreated by MNC's in central locations. The paper sumarises the empirical evidence insupport of the alternative model proposed here and outlines some of the key theoreticaland policy implications of this new way of conceptualizing spill over effects.