The latest episode of my Economics Explored podcast is on Foreign Direct Investment (FDI) and Productivity. In the episode, I speak with the authors of a recent study published in the Journal of International Business Studies: Foreign Influence, control, and indirect ownership: Implications for productivity spillovers. The authors of the study are Sara McGaughey, soon to take up a position as Professor at Copenhagen Business School, and Professor Pascalis Raimondos, Head of the School of Economics and Finance at QUT Business School.

Sara and Pascalis have taken advantage of the huge Orbis business database which has allowed them to construct a longitudinal/panel dataset of nearly 576,000 manufacturing firms across 20 European countries. They find evidence that controlled foreign firms can boost the productivity of other firms in the same industry (horizontal spillovers), while previous studies had only convincingly found evidence of vertical spillovers, between foreign affiliates and their domestic suppliers.

Hence, we can be even more confident that countries such as Australia which are broadly open to FDI by multinationals can benefit from ‘spillover’ effects that boost the productivity of domestic firms. For instance, domestic suppliers to multinational subsidiaries can benefit from having to meet higher standards, and locals who work in such subsidiaries can later take the skills and knowledge they gain to other businesses in the economy.

All that said, we do need to scrutinise proposals for foreign investment from foreign state-owned or state-influenced companies, and it is legitimate that our Foreign Investment Review Board (FIRB) considers any national security implications, as it has increasingly been doing regarding investments from Chinese state-owned or state-influenced companies.