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No. 30: Foreign Direct Investment and Productivity Growth: The Canadian Host-Country Experience

by Surendra Gera, Wulong Gu and Frank C. Lee, Industry Canada, April 1999


In this paper, we analyze the impact of technology transfers and spillovers from inward foreign direct investment (FDI) on the production cost and structure of Canadian industries. Specifically, we: (1) estimate the effects of inward FDI on the cost of production; and (2) examine the impact of FDI on the structure of production, that is, the effects on demand for factors such as capital, labour, intermediate goods and R&D capital. In doing so, we control for domestic and international R&D spillovers. We find that inward FDI lowers production cost and increases productivity in most Canadian industries, and that it alters the structure of production as industries adjust their demand for factor inputs. Our estimates show that inward FDI is biased against the use of capital, labour and intermediate goods and somewhat biased toward the use of domestic R&D. We also find evidence of significant positive international R&D spillovers through trade flows. The results indicate that international R&D spillovers are biased against the use of physical capital, labour and intermediate goods, and biased toward the use of domestic R&D capital. The relationship between domestic R&D and international R&D spillovers suggests that domestic firms must invest in R&D to capture the benefits of R&D spillovers from abroad.

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