A Firm-Level Analysis of Technological Externality of Foreign Direct Investment in South Africa

This paper examines how Foreign Direct Investment (FDI) impacts on productivity performance in host economy by raising and addressing two key questions: (i) To what extent does technological externality of FDI (FDI Spillover) rely on host economy’s skill deficiency characteristic before it can be generated and appropriated? (ii) Is there a regional dimension to the level of spillovers from multinationals to domestic firms? Using establishment level data for the South African economy, we estimate regression equations for a representative sample of her manufacturing plants. Our findings reveal that regardless of the environmentally imposed skill deficit factor, foreign firms are able to generate productivity spillovers for their host. Successful diffusion to domestic firms is however mediated and significantly circumscribed by the skill factor. It also appears that some support exists for the claim that level of FDI spillovers to domestic firms relies on regional presence, i.e. closeness to the region in which foreign firms locate.