positive spillover effects of FDI.
The level and management capacity of an enterprise is also reflected in business strategy planning , planning, operational management, etc. Through strategy, enterprises can create, maintain and develop new competitive advantages, and thus enhance the competitiveness of enterprises, thereby taking advantage of positive spillover effects and limiting negative spillover effects of FDI.
1.3.1.2. Human resources, absorptive capacity and technology gap
of the business
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The spillover effects from FDI to domestic enterprises also depend largely on the knowledge , skills, and techniques of domestic workers. To take advantage of the spillover effects effectively, enterprises must prepare human resources that are adaptable to the requirements of technology, have the ability to quickly absorb new production processes and technologies, quickly master production, and have the ability to produce high-quality products that meet export standards and compete with FDI enterprises. If the users and operators of new technology lack specialized knowledge and skills, they cannot maximize the capacity of machinery and equipment. In today's era, when science and technology are developing rapidly, skilled labor is a major determinant of the spread and effectiveness of technological innovation. This shows that in addition to investing in equipment and machinery innovation, businesses must also focus on human resource training policies.
The spillover effect of FDI requires the ability to absorb from domestic enterprises.
The spillover effect of FDI from labor migration will not occur if the absorptive capacity of domestic enterprises is absent. Likewise , when FDI enterprises introduce new technology into the host country, the ability of local enterprises to observe, learn and absorb this new technology depends on the level of their human resources. Therefore, MNCs will also choose to introduce new technology into a country that is suitable for the development level of that country to gain the highest profits. Technology absorbed through FDI from developed countries to newly industrialized countries, or developing countries may include R&D activities accompanied by new inventions and combined with
R&D activities of the host country to be able to produce products suitable for the market and level of the host country. Along with it, technology from FDI to open economies with lower industrial levels may include the transfer of goods , machinery and training in installation and management with leading experts. But the technology coming to less developed and closed countries is outdated technology to produce less sophisticated goods and consume in the domestic market. In short, the skill and education level of the people and enterprises of the host country will determine the level and effectiveness of technology transfer through FDI.
R&D activities of domestic enterprises play an important role in generating technology spillover effects from FDI . It affects not only the amount of technology transfer , but also increases the absorptive capacity of domestic enterprises. While there are negative effects of competition from FDI enterprises on domestic enterprises that do not conduct R&D activities, enterprises that conduct R&D are not affected by the competition effect. This means that domestic enterprises with R&D activities tend to have better ability to compete with FDI enterprises than enterprises without R&D activities, and the absorptive capacity depends not only on human resources, but also on R &D activities . Domestic enterprises with or without R&D activities benefit from spillover effects through backward linkages with FDI enterprises, but the spillover effects for enterprises with R&D activities are larger than those for enterprises without R&D activities.
Another factor that affects the spillover effects of FDI is the technological gap between domestic and foreign firms . “ Absorptive capacity includes the ability to absorb knowledge generated by others and adapt it to their specific applications, processes, and habits ” [162] . This requires domestic firms to maintain a moderate technological gap in order to benefit from the advanced technology of FDI firms. If the technological gap is too small, FDI firms will pass on the benefits to domestic firms ( Kokko , 1994). According to Findlay (1978) and Wang and Blomström (1992), the importance of spillover effects from FDI will increase with the technological gap , as it increases the opportunity for domestic firms to obtain higher levels of technology.
higher efficiency through imitation of foreign technology (catch-up hypothesis)
technology).
However, the technology gap should not be too wide because this will prevent domestic enterprises from absorbing the technological advantages of FDI enterprises. The diffusion of technology is not an automatic and direct effect that stems from the existence of a knowledge base in the possession of other enterprises: it also requires the recipient to have the ability to absorb and apply that technology [133], [146], [170], [197]. A commonly used indicator of the absorptive capacity of domestic enterprises is the level of spending on R&D activities [92], [116].
The concept of absorptive capacity has been expressed not only at the microeconomic level , but also at the macroeconomic level. It is often associated with the level of development of a country [83], [196] and especially with NNL. Furthermore, Blomström, Kokko and Zejan (1994); Kokko and Blomström (1995) show that FDI enterprises use advanced domestic technology and industries with a higher proportion of skilled labor. Other factors , such as infrastructure support, are also included in the concept of absorptive capacity [76], [137 ] . Hermes and Lensink (2003) argue that a developed financial system increases the occurrence of FDI spillover effects, as it reduces the investment risks of domestic firms seeking to imitate the technology of FDI firms, or upgrade the skills of their employees [121].
The relationship between the level of development of the host country and the magnitude of FDI spillover effects has been established through two complementary arguments. First , in the context of the labor mobility channel, a lower level of spillovers will occur in less developed countries. Typically, FDI firms pay higher wages to workers than domestic firms. In less developed countries, the wage differential is often higher , making the transfer of workers from FDI firms to domestic firms more difficult. Second , it is less likely that less developed countries (with lower absorptive capacity ) will attract FDI firms with strong linkages to local suppliers and customers [174].
1.3.1.3. Export capacity of enterprises
The export capacity of domestic firms influences the occurrence of spillover effects of FDI. It is argued that domestic exporting firms already face significant competitive pressures in foreign markets and therefore FDI firms operating in the domestic market will create additional relevant pressures [79]. As firms improve their export capacity, their relevance to the domestic market decreases and the negative impact associated with competition from MNCs becomes less significant. But the spillover effects of FDI will be more evident in the case of non-exporting domestic firms. Domestic firms will have to face competition from larger FDI firms not only to absorb foreign technology, but also, according to Barrios and Strobl (2002) and Shoors and Van der Tol (2002), to cope with competition from MNCs in the domestic market, thus preventing negative impacts through competitive channels [66], [181].
1.3.1.4. Size of businesses
The size of domestic firms is also associated with the spillover benefits from the presence of FDI firms. Small firms (in terms of production or labor) are less likely to compete with FDI firms, but suffer more losses [59]. Moreover, such firms may not have a large enough scale of production to imitate some of the technologies introduced by FDI firms. Therefore , larger firms may benefit more from the presence of FDI firms. In addition, different capacities of firms receive spillover benefits [ 151], [179]. In particular, FDI in a transition economy may have a different impact on local private and SOEs.
1.3.1.5. Financial capacity
If domestic enterprises have capital , research and development activities , technology transfer trading will be carried out easily, and then it will create conditions for positive spillover effects from FDI . However, a reality that is happening in domestic enterprises is the lack of capital for production and business as well as technological innovation, so implementing technological innovation is very difficult . Because of the important role of capital in technology , when choosing technological innovation, enterprises need to consider and calculate specifically the ability and time to mobilize capital, the ability to use capital effectively.
efficiency. If a business innovates technology at all costs without taking into account the efficiency of investment capital, it will lead to the risk of bankruptcy. On the other hand, if a business knows how to mobilize capital quickly and use capital effectively for technological innovation, the efficiency it brings will be enormous, helping the business affirm its position in the market .
1.3.2. External factors of the enterprise
1.3.2.1 . Strategy of Multinational Corporations
The strategy of MNCs here implies the role of foreign subsidiaries in the system of parent companies. If the subsidiaries are only intended to serve the market in the host country, the transferred technology will have to be suitable for the domestic market. Therefore, product technology will be installed to suit domestic needs. Training is based on the experience of MNCs, but also on domestic needs. This strategy will create opportunities for the host country to receive technology from MNCs. If the subsidiaries have only a limited role and little training is done in the host country, the task of the subsidiaries is only to exploit cheap labor costs. As a result, technology transfer will be very limited and technology spillover from training will also be less likely .
1.3.2.2. Institutional factors
Regulatory, legal and institutional factors determine the ability of individuals to respond to market signals. Some institutions, such as intellectual property rights, may limit the leakage and diffusion of technology from FDI to domestic firms, but they may stimulate technology transfer from parent firms to subsidiaries and may promote innovation. To increase spillover effects in these situations, conditions on localization and market entry should be used. Authorities should also ensure competition in labor markets and provide the necessary information to reduce transaction costs.
Government policy factors have both positive and negative impacts on technological innovation of enterprises. While most policies such as tax incentives , credit incentives, policies to encourage investment in technological innovation, and other government support policies for technological innovation have a positive impact on technological innovation,
positively impacting technological innovation. If governments maintain many regulations that hinder technological innovation of enterprises such as : complicated and lengthy procedures for requesting support for technological innovation , regulations on technology transfer, regulations on industrial property rights protection still have many limitations , it will hinder the process of technological innovation . From there, it will affect the appearance of spillover effects of FDI.
Several studies have found a relationship between trade policy and indirect benefits from FDI. Bhagwati (1978) hypothesized that compared to an import substitution strategy, an outward -looking strategy allows attracting a larger volume of FDI, even when the size of the domestic market is small. For both reasons, it can be expected that the spillover effects of FDI are likely to be positive if the government policy is export-oriented and less positive, or even negative, if the policy is import substitution-oriented [71].
However, Kokko et al. (2001) assert that to succeed in countries with inward-oriented trade policies, MNCs are likely to use technology that is not available to domestic firms ( or at least , only in a weakly developed form), thus creating a huge potential for the existence of technology spillovers and learning effects [ 138 ].
With an export-oriented trade policy, MNCs will rely on their advantages mainly in international distribution and marketing networks on new production technologies , although in this case, FDI spillovers may also occur through exports. It is expected that they will be of lower importance than under a restrictive trade policy . MNCs are more focused on local markets, establishing more inter - industry relationships with domestic firms, increasing the possibility of spillovers [ 61]. Furthermore, if MNCs produce for foreign markets and domestic firms produce for local markets, the possibility of spillovers through imitation will be reduced if goods produced for the local market use different production processes than those used for the export goods ( due to differences in design , quality or other characteristics). However, if the requirements apply to MNCs serving large foreign markets, it may be possible to regulate local suppliers as well.
The direction and potential for overflow will increase [123].
Intellectual property rights (IPR) are an important factor, not only increasing MNCs ' investment in a country [ 149], but also increasing the possibility of spillover effects from FDI. Because if the IPR protection regime is weak, there will be a tendency to attract FDI mainly at the low technology level [123]. Moreover, MNCs will tend to choose investment projects that are wholly owned by them [182]. According to Javorcik (2004), if IPRs are not secured, MNCs will prioritize investment in projects that are distributed to local production . All these factors will hinder the occurrence of spillover effects [123]. However, IPRs can be seen as an additional cost for imitators and thus be viewed as a limitation on the potential benefits for domestic firms. Two other factors that determine the persistence of FDI spillovers can be inferred from the model of Fosfuri et al. (2001) [105]. The first concerns the type of training received by workers at MNCs. If workers receive training in a particular technology of the firm, local firms have an advantage in acquiring that technology , since it is more costly to adapt to their own production processes . Second , it is connected with the existence of restrictions on labor mobility, such as restrictions on the transfer of workers from MNCs to domestic enterprises and thus , the occurrence of spillover through labor mobility channels.
According to Wang and Blomström (1992), if MNCs face stronger competition in the domestic market, they will be forced to use more advanced technology to secure their market share. In this case , spillover effects may increase with competition in the domestic market [197]. However, high levels of competition may also lead MNCs to protect their technological advantages more actively, as shown in the model of Fosfuri et al. (2001) [105].
Another factor that also affects the occurrence of cross-industry spillovers is the high use of intermediate inputs by FDI enterprises , as this is an important condition for the occurrence of spillovers through backward linkages [174]. What motivates FDI enterprises to decide to invest in foreign markets also affects the existence of FDI spillovers. Potential drivers
In most studies based on traditional FDI theory, “ MNCs establish branches abroad , they bring with them proprietary technology and that is understood as their enterprises having advantages and allowing them to compete successfully with local enterprises - having superior understanding of the market , consumer preferences , local business practices ” [79].
According to Fosfuri and Motta (1999), MNCs' affiliates, by locating abroad with advanced technology, local firms can benefit from spillover effects, because those affiliates can then be transferred to the parent company [104]. Therefore, spillover effects from MNCs to domestic firms will be more evident when the traditional motive for FDI is dominant [ 97], [98]. The value of technology (including the elements and level of innovation ) is a decisive factor, and clearly shows the spillover effects of FDI. On the one hand, it stimulates domestic firms to try to access this technology, but on the other hand, it motivates MNCs to protect it [81]. Therefore, the impact of this factor is unclear.
1.3.2.3. Competition in the domestic market
The level of competition in the domestic market may also influence the spillover effects from FDI enterprises to domestic enterprises. High competition forces FDI enterprises to bring in relatively new and sophisticated technology from the parent company to maintain their market share [ 197 ] . Technology transferred to subsidiaries may leak out to domestic enterprises and thus the subsidiaries face more competition . The stronger the competition, the more advanced technology is introduced into the domestic market . Empirical evidence has shown that spillover effects from FDI are higher in industries with higher competition in the domestic market [180], [76], [135].
With a less competitive environment, domestic enterprises will make less effort to absorb and exploit the technology overflow from FDI enterprises. Moreover, without competition from FDI enterprises, domestic enterprises will be satisfied with the quality and price of goods and services because domestic enterprises can easily consume in the domestic market , although domestic enterprises have backward technology and low productivity. Therefore, the emergence of