Knowledge Spillovers from FDI: A Critical Review from the International Business Perspective

• DOI: http://doi.org/10.1111/ijmr.12054
• Date: 01 January 2016
• Published date: 01 January 2016
• Author: Alessandra Perri,Enzo Peruffo

Knowledge Spillovers from FDI:

A Critical Review from the International

Business Perspective

Alessandra Perri and Enzo Peruffo1

Department of Management, Ca’ Foscari University of Venice, 30121 Venice, Italy, and 1Department of Business

and Management, LUISS Guido Carli, Viale Romania 32, 00197 Rome, Italy

Corresponding author email: alessandra.perri@unive.it

This paper reviews and organizes the theoretical and empirical research on foreign

direct investment (FDI) knowledge spillovers from the international business perspec-

tive. In doing so, it develops a framework for the analysis of this phenomenon. The

suggested FDI knowledge spillover framework integrates both the macro-level

(country,industry, institutions) and micro-level (multinational firm, headquarters, sub-

sidiary, local firms) antecedents of spillovers with their consequences, and proposes to

analyse spillovers along three main attributes that characterize their occurrence, i.e.

their magnitude, scope and speed.

Introduction

A half-century of foreign direct investment (FDI)

spillover research has led to the development of

many different perspectiveson the topic. The benefits

arising from foreign investment by multinational

firms are a matter of considerable importance for

host countries. When multinational corporations

(MNCs) locate their activities abroad, they channel

capital inflows, raise local employment and bring

technological and managerial expertise to the host

economy.

As recently stated by Eden (2009a, p. 1065), the

literature on the impact of FDI on host countries

‘tends to be dominated by economists’. Indeed, while

many of the consequences of private investment from

abroad are relevant for the objectives of research on

growth and international economics-related issues,

they go beyond the scope of management studies. For

example, the analysis of the direct welfare effects

originating from increased levels of capital stock or

employment generated by FDI does not fall within

the aims of managerial research. However, the locali-

zation of MNC subsidiaries is associated with several

other indirect effects that are more ‘micro-founded’.

These effects deal with the extent to which the stra-

tegic interaction between foreign and local firms

alters their relative competitive positions, owing to

the impact of knowledge spillovers. Knowledge

spillovers (KSs) can be defined as informal flows of

technological knowledge from foreign to local firms

(Eapen 2012). Although other types of FDI externali-

ties exist, this study focuses specifically on this

effect. In fact, the FDI knowledge spillover effect

(FDI-KSE) is of great interest for management and

international business (IB) scholars (Driffield and

Love 2007; Meyer 2004), for at least two reasons:

first, because it depends critically on the actions and

strategies of both domestic and foreign firms (Chang

and Xu 2008; Giroud 2012), and is therefore not

outside the control of managerial theory and prac-

tice; second, because its understanding allows

comprehensive evaluation of the costs and benefits

The authors would like to thank Ram Mudambi, Grazia

Santangelo, the associate editor TimEdwards and the anony-

mous reviewersfor their constr uctivecomments and sugges-

tions on previous versions of the paper.

© 2014 British Academy of Management and JohnWiley & Sons Ltd. Published by John Wiley & Sons Ltd,9600 Garsington

Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA

International Journal of Management Reviews, Vol. 18, 3–27 (2016)

DOI: 10.1111/ijmr.12054

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that domestic and foreign firms may reap when they

come into contact (Chang and Xu 2008; Sanna

Randaccio and Veugelers 2007).

In spite of its relevance, there is limited consoli-

dation of the FDI knowledge spillover (FDI-KS)

research in the IB literature. Most studies on FDI

externalities have adopted a ‘host-country’ perspec-

tive in the attempt to analyse the conditions under

which advanced MNCs can sustain the growth of

less developed contexts. However, when focusing on

knowledge-based spillovers, the perspective of

foreign firms becomes equally important. Because

knowledge is the firm’s most strategic resource

(Grant 1996), its diffusion may seriously endanger

foreign firms’ competitive position. Therefore, espe-

cially when investing in developed countries where

domestic agents are likely to be provided with high

absorptive capacity, foreign firms are not indifferent

to the risk of spilling their knowledge to local coun-

terparts (Perri et al. 2013).

In order to account properly for the perspective

of foreign firms, some authors have highlighted the

need to frame the FDI-KSE more explicitly in

IB literature (Eden 2009a; Meyer 2004). This paper

goes in the same direction by undertaking a system-

atic review of the FDI-KS research from the IB per-

spective. In doing so, we build on a special issue of

the European Journal of Development Research

(Vol. 24, 2012) on FDI-assisted development, which

suggests that FDI-KSs are governed by the interac-

tion among variables operating at different levels of

analysis (e.g. firm, context, institutions) (Narula and

Driffield 2012). Following this multilevel approach,

we develop a framework for the analysis of FDI-KSs,

which incorporates relevant antecedents and conse-

quences. We categorize antecedents along two main

dimensions: (1) a macro-level of analysis (including

determinants related to countries, industries, culture

and institutions); and (2) a micro-level of analysis

(including determinants related to the headquarters

and the MNC, the subsidiary and the local firms).

While other literature reviews exist on the topic of

FDI spillovers (Crespo and Fontoura 2007; Görg and

Greenaway 2004), they have focused mainly on the

growth opportunities that relatively backward host

countries may seize from the presence of advanced

foreign firms, thus overlooking the importance of

competitive interaction, central to our framework,

and underplaying the perspective of foreign firms.

By adopting an IB standpoint, we explicitly take into

account the role that foreign firms and, more specifi-

cally, their subsidiaries may play in shaping the pat-

terns of FDI-KSs through their own strategies.

Hence, we contribute to the literature on FDI-KSs by

analysing this phenomenon from the perspective of

foreign firms, and by focusing on subsidiaries as

strategizing actors in the spillover process. Moreover,

we identify and systematically define a set of FDI-KS

attributes: namely, magnitude, scope and speed. We

propose that such key FDI-KS attributes can be used

in future empirical studies.1Specifically, by includ-

ing the speed of FDI-KSs in this research model, we

highlight the importance of assuming a dynamic

view of this phenomenon. While traditional theories

of spillovers are mainly static, analysing FDI-KSs

from an IB perspective implies focusing on how they

evolve over time. In fact, because the sustainability

of a competitive advantage critically depends on the

time to imitation of product and process innovations

(Zander and Kogut 1995), the speed at which local

firms are able to intercept MNC knowledge is an

important factor influencing the extent to which FDI-

KSs can in reality harm a foreign firm’s competi-

tive position and, symmetrically, benefit domestic

companies.

The paper is structured as follows. First, we define

different types of FDI spillovers, and provide justifi-

cation for our focus on knowledge-based spillovers.

Second, we review existing literature on the anteced-

ents and consequences of the phenomenon, high-

lighting the main contributions and limitations of

these studies. Finally, we integrate previous findings

with new perspectives into a framework for the thor-

ough understanding and further investigation of

FDI-KSs.

MNCs, knowledge and FDI spillovers

A number of studies suggest that FDI triggers a

broad array of effects on both the MNC host and the

home country (Lipsey 2004). Given their importance

for economic growth, the literature has investigated

these effects widely, identifying the existence of

product market effects, arising when FDI drives

MNCs to modify the quantity of goods they buy or

sell in their home and host country, and factor market

effects, occurring when MNCs change their demand

for capital and labour both in their host economy and

1This is consistent with the approach of Jindra et al. (2009).

In their study on linkages, the authors highlight the impor-

tance of defining linkage attributes as a way to improve

scholars’ ability to assess linkage impact.

© 2014 British Academy of Management and John Wiley & Sons Ltd.

4A. Perri and E. Peruffo