Foreign Direct Investment Spillovers and the Absorption Capabilities of Domestic Firms in the Argentine Manufacturing Sector (1992-2001)

Abstract

Argentina received large amounts of FDI inflows during the 90s. At the same time, deep structural reforms were introduced, forcing domestic firms to rapidly undertake restructuring processes in order to adapt to the new economic and institutional environment. This paper explores to what extent FDI helped or hindered those restructuring processes, analyzing whether positive (or negative) productivity spillovers arose from the increasing presence of TNCs affiliates. We found that TNCs affiliates have higher productivity levels than domestic firms and that the latter, on average, received neither positive nor negative horizontal and vertical (backward) spillovers from the growing presence of foreign firms in the local economy. However, we also found that domestic firms with high absorption capabilities reaped positive spillovers from TNCs presence while those with low absorption capabilities were more likely to receive negative spillovers. These findings suggest that those capabilities are key determinants of the possibilities of domestic firms to take advantage of incoming FDI flows into their countries.