Multinational Firms, Innovation and Productivity
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Multinational Firms, Innovation and Productivity

Davide Castellani and Antonello Zanfei

This book gets to the root of how and why multinational firms differ in the cross-border creation, transfer and diffusion of technology, and provides fresh evidence on the effects that these differences have on productivity and innovation in the economic systems in which they are active.
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Chapter 6: In Search of Horizontal Spillovers from Multinationals: The Role of Firms’ Heterogeneity

Davide Castellani and Antonello Zanfei


6. In search of horizontal spillovers from multinationals: the role of firms’ heterogeneity 6.1 INTRODUCTION In the previous chapter we stressed that most recent works did not find any sound evidence of positive intra-industry spillovers. The main theoretical explanation to these results is that multinational firms have strong incentives to prevent information leakages and have very few incentives to transfer part of their knowledge to their competitors in the host country. Furthermore, they may well push domestic firms out of the market by stealing their market share and by forcing them to produce at higher unit costs. Under these conditions, negative competition effects tend to outweigh positive externalities from the activities of foreign multinationals in the host country. However, we have also noted that a closer look at the empirical evidence reveals that positive horizontal spillovers from foreign affiliates of multinational firms to host country firms do occur under specific circumstances. In particular, a large literature has focused on the role of technology gaps and absorptive capacity in facilitating such positive externalities. In a nutshell, the technology gap hypothesis posits that in order for a knowledge transfer to occur, the foreign firm should have something to ‘teach’ and domestic firms should have something to ‘learn’. In most studies, a high productivity gap between foreign and domestic firms is taken as a good indicator for the possible existence of such conditions. In other words, if domestic firms are far away from the technological frontier of the foreign multinationals,...

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