EXPLORING SPILLOVER EFFECTS
Master Thesis
Author Robbert Rijssenbeek
Student ID 1229664
Adress Groningen
E-mail R.J.Rijssenbeek Robbert19@hotmail.com
First supervisor Dr. J.A.Neuijen J.a.neuijen@rug.nl Second supervisor Drs. R.W. de Vries R.w.de.vries@rug.nl University of Groningen
Faculty of Management and Organization International Business & Management Landleven 5
9747 AD Groningen
University of Groningen
Faculty of Management and Organization
Degree programme: Master
Specialization: IB&M
Title
Exploring Spillover effects
A multiple case study on Dutch service subsidiaries venturing in Spain
ABSTRACT
This paper gives a first picture in the area of spillovers effects of the activities of subsidiaries of Dutch service firms in Spain on their Spanish domestic stakeholders, and vice versa. However there is no comprehensive evidence on the exact degree or level of these effects. In
this thesis an attempt has been made to acquire evidence from qualitative research on the spillover effects. One would assume that it is logical and normal that firms learn from each
other. However firms are not eager to confirm that they learn from other firms (implicit learning). Results proved that indeed in reality almost every firm learns form another firm (explicit learning). This is important to know. For firms that are already vested in Spain but
also for firms that want to vest in Spain! But how firms learn, in which area, etc differs for each firm and for each country (firm, sector and country dependent). These results, problems
and solutions have been given for service firms in Spain.
KEYWORDS
Spillover Effects; Foreign Direct Investment; Spain; The Netherlands; Service
Sector.
PREFACE
The completion of this thesis marks an end of my study of International Business and management at the University of Groningen. The master International Business and
management has been a fulfilling academic experience in the process of writing the thesis. At this very moment, I am pleased to hand in this final report on spillovers, a report that attempts to explore and describe the spillover phenomenon, its categories and its relations.
I have enjoyed very much doing this research. First of all because this research is about a subject that fits perfectly within my master. It is a subject that is internationally orientated. Furthermore I have got to do an internship in Madrid (Spain) and write my thesis at the same time. I loved being back in Spain, and being able to write this research in this beautiful country. Next to that I have enjoyed writing this research because I was able to write it exactly in the way I wanted it myself. I have chosen to do my research in a different way than others do. I have done a qualitative research instead of a quantitative one, which most
researchers in this area have done. I am glad I did a qualitative research because this fits more within my style and I am convinced this was the best method for this research. On top of that the multiple numbers of Interviews made the research more lively and practically.
Furthermore I have analysed my data according to an unconventional method. Again I am glad that I did this because it turned out to be the best method for this research.
I would like to thank my parents that made it possible for me to attend University in the first place. Furthermore I would like to thank my supervisor Dr. J.A. Neuijen for his comments, reflections and guidance in how to analyse data. In addition I would like Bart-Jan Pennink who made it possible for me to go do an internship abroad. The thesis would also not have been a success without the interviewees’ readiness to collaborate in this project. I would like to thank all persons that assisted and supported me during writing this thesis. Thanks to “El Instituto de Análisis Industrial y Financiero” de la Universidad Complutense de Madrid, and in particular Joost Heijs, Paloma Almodóvar and Elena Gallego, I was able to do the
internship. Finally I would like to thank Nicolette Schnepper and Sarie Bongers, for their help, support, clear insights and above all their friendship.
SUMMARY Introduction
This thesis focuses on spillover effects between subsidiaries of Dutch service firms vested in Spain and their stakeholders. Spillovers are learning effects; when a firm learns from another firm. There exists little literature on this subject, especially on spillovers in Spain.
Goal
To draw a first basic picture of spillover effects between Dutch service subsidiaries and Spanish firms in Spain.
Objective
Since this research is part of a broader project this research provides insights in and
understanding of the spillover phenomenon in Spain. This research lays a basic platform of knowledge on which the following research may rely on. Since the subject of spillovers is a relatively new one (especially in Spain), this research wanted to give all the elements that can describe the phenomenon. This research provides an answer to why spillovers exist, what they are, how they arise, when they arise, what determinants are relevant, etc. But this research does not only present, analyse and describe these elements. This research also puts all these elements together and relates them to each other (see model below). To my knowledge no other research has done this before. Therefore the objective of this research is: To explore, analyse and describe the phenomenon of spillover effects between subsidiaries of Dutch service firms venturing in Spain, and their Spanish domestic stakeholders.
Central Research Question
What are the characteristics of the spillover phenomenon between subsidiaries of Dutch service firms and their Spanish stakeholders? And in which ways are they interrelated?
Method
This research has conducted multiple qualitative case studies, in the form of ten interviews. Analysis of these interviews has been done according to the paradigm model of Strauss & Corbin (1990). Before we could analyse the data the five themes that were identified in the literature review have been transformed into eight categories. These five themes are:
1. Actors 2. Mechanisms 3. Influences 4. Determinants 5. Levels
Results
The data that have been found from the interviews back up the model in which is stated that relations between the eight categories exist, and that a certain sequence pertains to them. Further, this research has claimed that the model could also be seen as a circle that can be completed. This thesis draws a first picture of spillover effects. It has shown why spillovers emerge, what they are, between who these occur, determinants for the overflow,
consequences and a strategy to develop spillovers. Most literature has only focused on the term spillover effects, and has not drawn an overall picture of the phenomenon. They merely wanted to prove that spillovers exist. Of what elements the phenomenon exists has been ignored in most case studies. This research has identified all the elements and has put all these elements together in one thesis. Furthermore this research has linked these elements. Data from the interviews back up the existence of these relations.
One would assume that it is logical and normal that firms learn from each other. However firms are not eager to confirm that they learn from other firms (implicit learning). Results proved that indeed in reality almost every firm learns form another firm (explicit learning). This is important to know. For firms that are already vested in Spain but also for firms that want to vest in Spain! How firms learn, in which area, etc differs for each firm and for each country (firm, sector and country dependent). The results, problems and solutions have been given for service firms in Spain. But not only the statement that firms learn from each other, and the description of how they do this, why, etc, is important. What may be even more important are the relations between these elements, the sequence and the complete circle. Overall there can be said that spillovers exist between subsidiaries of Dutch service firms and their Spanish stakeholders. Further this research claimed that in order to experience as much spillovers as possible, firms should adapt to the local market. The central strategy is
Subsidiaries of Dutch service firms Spanish Suppliers Spanish Competitors Spanish Clients Consequences -Technology -Management -Organisation -Marketing -Cultural -Productivity -Commercial In. Conditions -Absorption- capacity -Technology-capacity -Overall capacity -Networks / Relations Context -Level of competition -Level of firm concentration Cause FDI FII Local start-ups Core Category: Spillover effects Subcategory (Actors) Property -Imitation -Copying -Mobility -Demonstration Strategy Adaptation 1 2 3 4 5 6 7 8 Central Model
Explanation of the model
As could be seen from the model this research focuses specifically on the eight relations between the eight categories. One could also see that the relations are all interrelated and follow as certain sequence. On top of that the arrows and categories together form a complete circle. The eight relationships are presented by the thick black arrows in the model. The smaller white striped arrows within the sub-category are just to give the possible relations between the stakeholders but are not of any further meaning.
Relation 1
As can be seen from the model the central theme/category of this research is the spillover effects. This research wants to research the spillover effects between subsidiaries of Dutch service firms vested in Spain and their Spanish stakeholders. According to this research spillovers (cause) exist because foreign firm vest in Spain through FDI, FII or local start-ups. Relation 2
spillover effects from subsidiaries of Dutch service firms venturing in Spain on their Spanish stakeholders, and vice versa, are knowledge and information.
Learning also occurs on a continual basis. Firms continuously try to imitate or copy
(benchmark) from others. Spillovers can be experienced between a subsidiary and its clients, competitors and suppliers. Also spillovers exist between subsidiaries of different countries within the same holding (interrelations). These are the actors and together for the sub-category.
Relation 3
When spillovers do flow over they flow over according to four mechanisms (the property) between the actors. Most used mechanisms are 1) when a competitor copies something from another firm, or when a competitor takes over an employee of a competitor (mobility of workforce).
Relation 4
In order for firms to gain from spillovers, there are some determinants that have to be present. First a firm needs to have a good overall capacity and a strong network and relations with Spanish firms (intervening conditions).
Relation 5
In line with the above relation, the level of competition and the level of firm concentration play a role here (context). The consultancy firms face a low level of competition. This is because the consultancy sector is relatively new in Spain. The other service firms face more competition. However, almost all major local Spanish service firms, and also foreign service firms are concentrated in the capital city Madrid. With this the level of concentration is very high.
Relation 6
According to this research when a firm wants to experience or when a firm wants to gain the fullest from spillovers, the foreign firm needs to adapt to the local Spanish market (strategy). When a firm does not adapt to the local market, it faces too much problems with the market, cannot establish a network, etc, and as a consequence faces more difficulty to learn form Spanish firms.
Relation 7
This research claims that when a firm wants to experience spillovers the firm should first solve the problems it has pertaining specifically to the Spanish market, and the Spanish way of doing business. Most problems lay on the cultural level. Possible problems in this area and solutions have been given.
Relation 8
ABBREVIATIONS
FDI Foreign Direct Investment FII Foreign Indirect Investment MNE Multinational Enterprise
SME Small end Medium sized Enterprise
UNCTAD United Nations Conference on Trade and Development Embassy The Royal Dutch Embassy in Madrid (Spain)
Murphy’s fundamental Laws “Nothing is ever as simple as it seems”
Slogans on Spain
In general in The Netherlands: If you act normal you already act weird enough. (Doe maar gewoon dan doe je al gek genoeg)
(General slogan on Dutch people).
If one wants, one can agree with the existing stereotype of a Spanish person.
(Jack Urlus)
Image is everything!
(Sven Kallen)
Patience is a clean matter.
(Henk van Soest)
It certainly is not: act normal then you already act strange enough! Differences are still very important here, the society is very decentralised.
(Andre Driessen)
Spanish people are very proud, not specifically at their country, but at their village. They are curious. Very curious to foreign products and firms. They are interested in that.
(Dink de Vries)
Take attention to, and have patience.
(Erik Kavelaars)
Doing business in Spain takes a long time!
(Sabine Knobbout)
Emotions are the most important, if one can bring some sort of business next to that, then that is additive.
(Eric van der Laan)
You are who you know.
(Charles Janssen)
It is not “mañana mañana” (tomorrow tomorrow), but “mañana ya es hoy” (tomorrow is today).
(John van Haaren)
In the Netherlands: yes means yes, and no means no. In Spain: yes is not a yes, and no does not necessarily mean a no.
(Léon Bosch).
Spanish people like to show of their success.
(Léon Bosch)
Dutch people have the know-how. Spanish people have the know-who. It is the mix that is needed to do successful business.
(Roberto Spinosa Cattela)
The way of doing business in Spain is about who knows who.
(Dirk Kremer)
The market is being overestimated and the competitors are being underestimated.
(Dirk Kremer)
Mejor no conocido que bueno por conocer. Better be worse of with something one knows than change to something betters that one does not know.
TABLE OF CONTENTS Introduction……….14 Research motive………14 Research context………...14 Relevance………..14 Thesis structure……….15 Overview of content………. ………15 1 Background………..16 Introduction………...16
1.1 Foreign Direct Investment………...16
1.2 FDI and spillover effects……….17
1.3 FDI in Spain………19
Conclusion……….19
2 Basic Considerations………20
Introduction………...20
2.1 History on FDI and spillovers………….………20
2.2 Empirical studies on spillover effects……….21
2.2.1 General empirical case studies……….21
2.2.2 Statistical empirical case studies………..22
2.3 Mixed evidence………...23 Conclusion……….23 3 Research Design………...24 Introduction………...24 3.1 Phenomenon identification………..24 3.2 Research elements………...25
3.3 Conceptual model One………27
3.4 Research strategy and research model………27
3.5 Scope of the study………...29
Conclusion……….29
4 Literature review………..30
Introduction………...30
4.1 The phenomenon spillovers………30
4.2 Categories………31
4.3 Direct influences……….32
4.4 Actors and types of linkages………...33
4.5 Forms/Mechanisms……….34
4.6 Determinants………...35
4.7 Conceptual model Two………...37
5 Methodology……….40
Introduction………...40
5.1 Themes of qualitative inquiry……….40
5.2 Interview data analysis………42
5.3 Sampling………..43
5.4 Quality of the research design……….44
5.5 Coding by Strauss & Corbin………...45
5.6 The coding in practice……….46
5.7 Conceptual model Three……….49
Conclusion ………50 6 Findings……….51 Introduction………...51 Relation 1………..51 Relation 2………..52 Relation 3………..55 Relation 4………..55 Relation 5………..57 Relation 6………..58 Relation 7………..59 Relation 8………..61 Conclusion……….62 7 Analysis……….63 Introduction………...63 7.1 Relation Analysis..………..64 Conclusion……….69 8 Conclusion……….70 Introduction………...70
8.1 Overview of key outcomes………..70
8.2 Future Prognosis………...72
8.3 Recommendations………...72
8.4 Limitations………..73
References………74
INTRODUCTION Research motive
This master thesis will cover a part of a broader Research Project. The main title of this Research Project is: Dutch firms in Spain. With its subtitle being: Tendencies, Problems and interaction with the Spanish Productive System. The Research Project is initiated by “El Instituto de Análisis Industrial y Financiero” (IAIF) of the Facultad de Ciencias Económicas y Empresariales of the “Universidad Complutense de Madrid”, in cooperation with “El Instituto Neerlandés”. The aim of the project is to study the importance and behaviour of Dutch firms in Spain. Several aspects that have to do within the Project are for example: the motives of a Dutch firm to invest in Spain, the entry and exit barriers for Dutch firms or the success or failure factors that influence Dutch firms. In the first stage of the project three students are doing small case studies, based on interviews and reviews of the literature. These three case studies all interact with each other to assess the broader picture of Dutch firms in Spain. A significant aspect of the project concerns the spillovers from Dutch service firms on Spanish firms (i.e. what learning effects are generated by Dutch firms that influence the competitive and technological behaviour of their Spanish competitors, clients and providers) which in turn will be the subject of my master thesis. When this research is finished a follow up study on spillovers in Spain will be done as the next step in this Project. I am one of the three students who is doing this first stage of the two-year Project.
Research context
Firms today need to be fast growing, efficient, flexible, adaptable and future-ready to secure and maintain a dominant market position. Without these qualities it is virtually impossible to be competitive in today’s global economy. Due to these developments, firms have to face increased competition in their home market, while on the other hand new opportunities in foreign markets arise. Multinational Enterprises (MNEs) and Small and Medium sized Enterprises (SMEs) more and more internationalise. They are doing this for lots of reasons; the most important ones are getting access to other (new) markets, expanding their business for scale and scope possibilities and growth opportunities. These and other factors have led to the increased presence of Dutch firms in Spain. Firms may internationalise through Foreign Direct Investments (FDI) (Joint-Ventures, Greenfields, Acquisitions and Mergers) or Foreign Indirect Investments (FII). When venturing abroad (FDI) the foreign subsidiary of a MNE or a SME comes in contact with several new foreign stakeholders. Between these local firms and this subsidiary certain flows emerge. These flows are called spillover flows or spillover effects. A spillover effect is when one firm learns from another firm through the overflow of information and knowledge.
This thesis draws a first picture in the area of spillover effects between subsidiaries of Dutch service firms that are vested in Spain and their Spanish stakeholders.
Relevance
After the industrial revolution, the technology age, the communication age, the age of information and knowledge has begun. Spain is slowly transforming from a production country with its cheap labour and with low added value, into a more service orientated
think that the Spaniard is eager to learn from foreign firms that want to vest in Spain. This thesis is exploring if, how, when, etc a Spanish firm is learning from a foreign firm.
Thesis structure
This thesis will follow a certain structure (see figure 1 below for a visual explanation). The thesis consists of six chapters. The subject of each chapter will be described below in the overview part. Each chapter will begin with stating important definitions of terms that will be used in that chapter. After that figure 1 is presented to remind the reader at which point we are in the thesis in order to keep a clear overview. Sometimes a note, a reminder or an explanation will appear. This is to inform the reader, or stress a particular finding.
Figure 1: Research outline
Overview of content
Chapter Content
1 Background: FDI in general and types of FDI, FDI and Spillover effects, the direct and indirect effects of FDI, FDI in Spain, Reasons to invest in Spain and the conclusion.
2 Basic Considerations: history on FDI and spillovers, empirical studies on spillover effects (case and statistical studies), the mixed evidence that exists and the
conclusion.
3 Research design: problem identification, research aim, research objective, research question, research product, conceptual model 1, research strategy and research model, scope of the study and the conclusion
4 Literature review: what are spillovers, to what categories, which direct influences, to whom, through which linkages, through which forms, what determinants, conceptual model 2 and the conclusion.
5 Methodology: themes of qualitative inquiry, sampling, criteria, the respondents, quality of research design and the conclusion.
6 Findings: method of data analysis, data analysis, conceptual model 3, findings and the conclusion
7 Analysis: the analysis of the eight relations and the conclusion
8 Conclusion: overview of key outcomes, recommendations, future prognosis, limitations and the conclusion.
Chapter 1
Background Chapter 3 Research Design
Chapter 4 Literature Review
Chapter 5
Methodology Chapter 7 Analysis Chapter 2
Basic Consideratio ns
Chapter 6
BACKGROUND
(CHAPTER ONE)
Definition of terms
FDI: An investment involving a long-term relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate) (UNCTAD).
Greenfield investment: Establishing a production or service facility starting from the ground up, i.e. from a green field (Either & Markusen, 1996).
Multinational Enterprise (MNE): A firm that has operating subsidiaries, branches, or affiliates located in foreign countries (Either & Markusen, 1996).
Introduction
In this chapter the following subjects will described. First is described what FDI is, why FDI exists and the types of FDI. Then the relationship between FDI and spillover effects is discussed. The direct and indirect effects of FDI are analysed next. After that FDI in Spain and why firms should or already invest in Spain is described. We will begin this chapter with two questions that need to be asked and answered prior to the actual research. These two questions are: 1) what are spillovers? And 2) how do spillovers emerge? At the end of this chapter these concepts and answers must be clear.
1.1 Foreign Direct Investments (FDI)
Nowadays most of the large multinationals have to see the world as their new potential purchase- and customer-market. These companies can not escape globalising effects and can cope with these through internationalisation strategies.
The acceleration of firms’ international expansion via FDI is one of the major causes of the rapid transformation of the world economy in recent years. Figures concerning the years 1985-1996 show that FDI grew twice as much as world trade during that period (UNCTAD). The main reason for the increasing prominence of FDI incentives is arguably the
internationalization of the world economy. Global trade liberalization has made it easier for MNEs to set up international production networks, so that a larger share of output is shipped to international customers or affiliated companies in other countries rather than sold to local customers. This has reduced the impact of market size (Blomstrom & Kokko, 1998).
Note: exactly why firms internationalise will not be explained in this research since this is of no further relevance.
Why FDI?
As explained above a lot of firms internationalise nowadays. FDI is a form of
internationalising. The Reason that MNEs internationalise are mainly because they are attracted by strong economic fundamentals in host economies. More reasons why firms internationalise to Spain will be explained below. Firms can internationalise through Foreign
Chapter 1
Background Chapter 3 Research Design
Chapter 4 Literature Review
Chapter 5
Methodology Chapter 7 Analysis Chapter 2
Basic Consideratio ns
Chapter 6
Types of FDI and FII
-Foreign Direct Investments (FDI) Joint-venture
Whole owners of a subsidiary: - Mergers/Greenfield/Acquisition -Foreign Indirect Investments (FII)
Exports Licences
An important aspect of FDI is not only that an entity in another country becomes the owner of a firm, but that this entity has management control and supervision as well. FDI is therefore considered as the ‘highest’ level of internationalisation (Hessels, 2005).
Note: exactly through which strategies and processes firms can internationalise will not be explained in this research since this is of no further relevance.
According to Knell (2003), FDI is important because:
It can be an important catalyst for the economic restructuring. It provides finance for the acquisition of new plant and equipment It can transfer technology directly to foreign affiliates
It can diffuse or spillover indirectly to the local economy
It can generate technology
It can diffuse technology (spillovers)
Based on the points above there can be said that local firms may gain by the entrance of foreign firms. So by exercising FDI, foreign firms enter a market, and local firms may gain from the diffusion of spillovers.
1.2 FDI and spillover effects
According to Hymer (1976), FDI not only involves flows of capital but the transfer of other important assets as well, such as management, commercial, marketing and organisational expertise, technology, and productivity (process and/or product influences). FDI has direct and indirect effects. Both these affects are explained below.
Figure 2: Direct and indirect effects of FDI
Source: elaboration on Heijs, 2006
Direct effects of FDI Indirect effects of FDI
-The increase of the investments through the FDI
-The development of new sectors
Indirect effects from firms
Explanation of the figure
The figure states some direct and indirect effects of FDI. There may be more effects, but these are the main effects that are mentioned most in the literature. Only on these effects will the research go further.
Indirect effects do not necessarily mean positive spillover effects. This will be shown in the next chapter and is also shown in this figure by stating that productivity may be high (increase) or low (decrease). In this thesis, when talking about spillovers, the research is talking about positive spillovers. This based on the logical reasoning that firms only want to learn positive things from each other.
A) Direct effects
Posituive FDI can be of fundamental importance for the economic development of a country. It can have positive direct effects but also negative direct effects.
An important negative direct effect from FDI may be that a country may be careful with allowing foreign firms to enter their local market. This is because they fear that a foreign country will take over the local market, taken over control of local firms and steal and plunder local firms’ market share. So some countries may favour protectionism. This is why Spain had a protection of its national market during the beginning of the 20th century (Donges, 1975). More on this will be described in chapter two, in the paragraph of “history of FDI and spillovers”.
Positive direct effects:
A first aspect is the increase of the investments. For example in the case of Spain, FDI was fundamental in the evolution of the Spanish economy from the beginning of the
industrialization in the 19th centuryuntil today (Donges, 1975; Nadal, 1975; Tortella, 1998). In the 20th century foreign money was necessary for financing the industrialization which lacked financial resources in its local market. This served as an initial drive or “push” for growth. Between 1939 and 1959 Spain restricted the entrance of foreign capital. But from 1959 and on, FDI got a new impulse and was considered again as an essential element for the development and modernization of the Spanish productive system (Buesa & Molero, 1998), and they used the foreign investments as a final definitive ‘push’ for development
A second direct effect is the development of new sectors. This principle is based on the same theory, which was mentioned above.
B) Indirect effects
Indirect effects of FDI from a firm to another firm may be for instance: a change in the
productivity level, the learning of other (new) management techniques, technology learning, marketing learning, change in commercial expertise, and organisational learning. An indirect effect means the same as externalities, overflow or spillovers. I will use these concepts
invariably throughout this thesis. The spillover effects are the main subject of this thesis. So as to give an answer to research question 1: “What are spillover effects”? One can say that: spillover effects are the overflow or transfer of knowledge and information (tangible and intangible) about assets such as management and organisational expertise, technology,
entrepreneurship and access to markets
Some firms need to internationalise
Firms can internationalise through FDI
Indirect effects of FDI are spillover effects
These effects are obtained thanks to the presence of foreign firms in domestic foreign markets and the influence these firms have on domestic firms.
1.3 FDI in Spain
Foreign direct investment (FDI) has played a prominent role in Spain’s industrial
modernization over the last 40 years (Chislett, 2002).Also Muñoz , Roldan & Serrano (1978) state the crucial role FDI had in Spain along the first half of this century. The surge in FDI since Spain joined the European Economic Community (EEC) in 1986 has been such that it seemed at times as if the country was up for sale. The Spanish accession to the EC has involved a new boost in FDI (Bajo Rubio & Sosvilla Rivero, 2003). FDI helped Spain to sustain economic growth above that of other OECD countries. The bulk of the FDI, with a few notable exceptions, is not Greenfield but the result of mergers and acquisitions.FDI has been deemed as one of the main factors underlying the strong growth rates experienced by the Spanish economy for the last thirty years. In fact, the rising inflows of foreign capital made possible by liberalizing measures introduced since 1959 allowed the transformation of an economy until then characterized by its almost total lack of openness, to being one of the most important channels leading to the integration of the Spanish economy in world markets. Why invest in Spain?
There are a lot of reasons why foreign firms may want to internationalise to Spain. The most important of these (according to the Spanish government and the Royal Dutch Embassy of Madrid) are: the high economic growth rates of Spain, the large potential Spanish market, Spain is an international hub, and the high qualitative workforce. More reasons are summed up in the appendix (table 4).
Conclusion
In this chapter we have seen that a lot of firms internationalise, that most firms do this through FDI. We have also seen that indirect effects of FDI are spillover effects. This has been
schematically shown in the figure below.
Figure 3: Overview of chapter One
In this chapter two questions were proposed and answered, these are:
1) What are spillovers? Answer: Spillover effects are the overflow or transfer of knowledge
and information (tangible and intangible) about assets such as management and organisational expertise, technology, entrepreneurship and access to markets.
2) How do spillovers emerge? Spillover effects are the same as indirect effects of FDI. These
effects are obtained thanks to the presence of foreign firms in domestic foreign markets and the influence these firms have on domestic firms.
BASIC CONSIDERATIONS
(CHAPTER TWO)
Explanations
Foreign firms: A subsidiary of a Dutch MNE venturing in Spain. Domestic/local firms: A Spanish stakeholder of the Dutch subsidiary.
Reminder
- Spillover effects are the overflow or transfer of knowledge and information (tangible and intangible) about assets such as management and organisational expertise, technology, entrepreneurship and access to markets (what).
- Spillover effects are the same as indirect effects of FDI. These effects are obtained thanks to the presence of foreign firms in domestic foreign markets and the influence these firms have on domestic firms (how).
Definition of term
Technology: technological knowledge, which is basically obtained through investments in R&D, whose returns are partly public in the sense that they have positive externalities or, in other words, technology spillovers (Martin, Velazquez & Crespo, 2002).
Introduction
In this chapter we first look at the general history on FDI and spillovers. After that we look more deeply into the existing literature on spillover effects. This is done by looking at the different studies that exist on spillover effects. This paragraph is further divided in case studies and statistical studies (Inter-industry, Intra-industry positive effects and Intra-industry negative effects). After that the mixed evidence that exists on spillover effects will be
covered.
2.1 History on FDI and spillovers
In the 1970s, many host countries governments and some economist viewed multinational investment as negative to host countries welfare and development, creating monopoly situations that exploited those economies and stifled the local competition.
Most host countries have liberalised their FDI regulations since the early 1980s, expecting FDI inflows to bring new technologies (broadly spoken: product, process and distribution technology as well as management and marketing skills), and know-how and thus contribute to increasing productivity and competitiveness of domestic industries (Smarzynska, 2002). Also the view in the 1990s is different in that MNEs may stimulate development in host countries (Markusen & Venables, 2003). It is nowadays generally accepted that attracting and embedding FDI has important development effects because FDI represents an important source of spillovers. Spillovers from FDI are regarded as one of the most practical and
Chapter 1
Background Chapter 3 Research Design
Chapter 4 Literature Review
Chapter 5
Methodology Chapter 7 Analysis Chapter 2
Basic Consideratio ns
Chapter 6
efficient means by which industrial development and upgrading can be promoted (Narula, 2004). Indeed, attitudes towards MNEs and their importance for economic growth have converged over the last two decades so much so that FDI is actively sought by most developing countries (Narula & Martin, 2003).
The role of FDI in the growth process has attracted a great deal of policy attention in recent years, not only in developing countries but also in the industrialized world. The emphasis now is mainly directed on the immediate effect of FDI on employment (Sanna Randaccio, 2003).
2.2 Empirical studies on spillover effects
The earliest discussions of spillovers in the literature on FDI date back to the 1960s. The first author to systematically include spillovers among the possible consequences of FDI was MacDougall (1960), who analyzed the general welfare effects of foreign investment. Other early contributions were provided by Corden (1967), who looked at the effects of FDI on optimum tariff policy, and Caves (1971), who examined the industrial pattern and welfare effects of FDI.
Empirical studies on international spillover can roughly be divided into two groups: Those that emphasize the exports channel
Those that emphasize the FDI channel.
Studies on FDI channel may be further divided into three groups:
1) First, there are case studies including descriptions pertaining to particular FDI projects or specific countries, which however rarely offer quantitative information and are not easily generalized.
2) Then there are a lot of industry level studies, most of which show a positive correlation between foreign presence and sectoral productivity (Smarzynska, 2002).
3) Finally, there is research based on firm-level data, which examines whether productivity of domestic firms is correlated with the extent of foreign presence in their sector or region. This one will be explained further below.
Firm-level evidence
This may be further divided into two categories.
The first group consists of developed country samples which find that MNE subsidiaries have positive impacts on the host economy’s productivity.
The second group consists of developing country’s samples which has mixed results about spillover effects. This group includes studies of: Kokko (1994), Aitken & Harrison (1999),Blomstrom (1991), Blomstrom & Kokko (1998).
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The demonstration of the existence of empirical studies on spillover effects may be further divided in general case studies and in statistical case studies. These two types of studies will be analysed below.
2.2.1 General Empirical Case studies
In the literature we find detailed case studies discussing various aspects of FDI in different countries and industries, and these studies often contain valuable ‘circumstantial evidence’ of spillovers.
there is no clear proof of spillovers, but it is reasonable to assume that spillovers are positively related to the extent of linkages.
There are also case studies of demonstration effects, technology diffusion, and labour training in foreign MNEs (Blomström & Kokko, 1998).
Note: Although these studies provide much detailed information about the various channels for spillovers, they say little about the importance of such spillovers.
Case studies showed that foreign MNEs may:
1) Introduce new know-how by demonstrating new technologies and training workers who later take employment in local firms
2) Either break down monopolies and stimulate competition and efficiency or create a more monopolistic industry structure, depending on the strength and responses of the local firms
3) Force local firms to increase their management efforts, or to adopt some of the marketing techniques used by MNEs.
Note: Although this diverse list gives some clues about the broad range of various spillover effects, it says little about how common or how important they are in general.
2.2.2 Statistical Empirical Case studies (productivity)
The statistical studies of spillovers reveal the overall impact of foreign presence on the productivity of local firms.
Note: However these studies are generally not able to say much about how the effects come about.
These studies typically estimate production functions for locally owned firms, and include the foreign share of the industry as one of the explanatory variables. They then test whether foreign presence has a significant positive impact on local productivity (or productivity growth) once other firm and industry characteristics have been accounted for (Blomstrom & Kokko, 1998).
Note: Although the data used in these analyses are often limited to few variables, aggregated to industry level rather than plant level, and in several cases of a cross-section rather than time-series or panel character, they do provide some important evidence on the presence and pattern of spillover effects (Blomstrom & Kokko, 1998).
Inter-industry
Almost all of the statistical analyses of spillovers have focused on intra-industry effects,but there are a few exceptions. Studies which have focused on inter-industry effects are from: Katz (1987), Aitken & Harrison (1999, Sjöholm (1999, and Lall (1980).
Intra-industry positive effects
The earliest statistical analyses of intra-industry spillovers examined the existence of
Intra-industry negative effects
On the other hand, there are several studies that find negative effects of the presence of multinationals on domestic firms, the most important being from: Haddad & Harrison (1993) and Blomstrom & Kokko (1998).
2.3 Mixed evidence
Based on the empirical studies stated above one can say that the policy debate is lively and often confusing, with one side stressing the positive role of MNEs as the main drive for the transfer of technology, and the other side maintaining a negative effect.
So the results on the presence of spillovers seem to be mixed.Why? Some reasons may be: The foreign affiliates’ levels of technology or technology imports seem to influence
the amount of spillovers to local firms.
The host country’s level of technical development may matter as a starting point (Kokko, 1994).
Kokko (1994) also finds that spillovers are positively related to the host economy’s capacity to absorb them.
Spillovers from competition are not determined by foreign presence alone, but rather by the simultaneous interactions between foreign and local firms. Hence, it is possible
that the spillovers are larger in cases where a few foreign MNEs stir up a previously protected market than in a situation where foreign affiliates hold large market shares, but refrain from competing hard with local firms. (Kokko, 1994)
The trade orientation of the investing firms. Kokko et al. (1996) note that local market oriented foreign investors in Uruguay have apparently had a stronger impact on local technology and productivity levels than have export oriented local firms.
Conclusion
The mixed evidence that could be seen resulting from the empirical evidence on spillover effects stresses that it is important to further explore the phenomenon of spillover effects. There are lots of ideas favouring or contradicting FDI. On the one hand there exist some negative opinions against FDI but on the other hand countries do intensify FDI. But all the countries hope to have, at short or long term, direct and indirect benefits form the entrance of foreign firms, which bring with them specific ‘advantages’ in forms such as technological product and process innovations, or in other forms such as organisation innovations. So it is important to understand and to examine the effects of these overflow generated by FDI, and to identify the mechanisms and characteristics that drive the capacity of learning and absorption! This thesis adds to the understanding of spillovers generated by FDI in a host country economy, which is an important issue for public policy.
RESEARCH DESIGN
(CHAPTER THREE)
Definition of terms
Conceptual framework: scheme of variables that are considered to be important, and the expected relations between these variables (Yin, 2003).
Research design: a plan that guides the investigator in the process of collecting, analysing and interpreting observations/data. It is a logical model of proof that allows the researcher to draw inferences concerning causal relations among the variables under investigation. It is the logic that links the data to be collected to the initial questions of study (Yin, 2003).
Introduction
This chapter focuses on the goal and the set up of this research project. First this chapter will
identify the spillover phenomenon and why this research is done. After that the Research aim, Research objective, Research question, Research product, Conceptual model One, Research strategy and research model, and the Scope of the study will be handled.
3.1 Phenomenon identification
It is nowadays generally accepted that attracting and embedding inward foreign direct investment (FDI) has important development effects because FDI represents an important source of technological spillovers (Narula & Martin, 2003).
The only trouble is that there is conflicting evidence that positive productivity externalities
generatedby foreign presence exist. As Kokko (1994) remarked: “Today’s policy literature is filled with extravagant claims about positive spillovers from FDI but the evidence is
sobering.” And indeed data limitations have prevented researchers from providing conclusive evidence of positive externalities resulting from FDI (Smarzynska, 2003).
The existing empirical works depend on such case studies, based on existing examples of externalities (Lall, 1980;Behrmann & Wallender, 1976; Watanbe 1983; Blomstrom & Kokko, 1998), and also indicate that till the end of the seventies there did not exist
comprehensive models nor theoretical arguments that these types of studies require: micro data with a qualitative and quantitative character (Heijs, 2006). As Blomstrom (1994) points
out, however, there are hardly any empirical studies analyzing explicitly the relationship between linkages and spillovers.
As could be seen in chapter three a lot of empirical statistical research has been done in the econometrical quantitative field. Al these studies have done quantitative case studies. There is no clear reason for this. These case studies were in general rather simple and did not take a lot of variables into account. Besides, the measures were not valid in a lot of times, as some researchers came with opposite results doing the same case study. Here is a gap in literature
Chapter 1
Background Chapter 3 Research Design
Chapter 4 Literature Review
Chapter 5
Methodology Chapter 7 Analysis Chapter 2
Basic Consideratio ns
Chapter 6
between the empirical studies based on quantitative measures and empirical studies based on qualitative measures.
In short: The majority of the studies based on econometrical models which analyse the effects of technological overflow, measure in reality the increase in productivity and interpreted this increase - based on the theory of growth and productivity - as proof that technological
externalities exist. But they do not analyse the real flows between domestic and foreign firms. There exists literature on spillover effects in general on country level, industry level or firm level. These are most of the times statistical case studies. But no research has been done yet on spillover effects in Spain and in particular not on spillover effects between Dutch firms and Spanish firms. On top of that, to my knowledge, no qualitative research on spillovers has been done yet.
3.2 Research elements Research aim
This research identifies characteristics of the spillover phenomenon in Spain. These characteristics are explored to provide insights and understanding.
Research objective
Researches agree that the phenomenon of spillovers exists, but hard evidence lacks in this area. Some quantitative case studies have been done, but these were mostly based on a few simple variables. Some case studies show negative, and some show positive spillovers with the same variables. Besides, these studies in reality only measure productivity. I do not think this is a good variable for measuring spillovers, and so I have placed my doubts on the results from these quantitative studies. This thesis explores if spillover effects exist between the proposed parties, what the characteristics of the phenomenon are, how these are in Spain, and how these are interrelated.
The figure below will help in explaining how a subsidiary in a host country is connected with his parent in the home country, and how spillover effects may flow.
To explore, analyse and describe the phenomenon of spillover effects between subsidiaries of Dutch service firms venturing in Spain, and their Spanish domestic stakeholders.
Parent of
firm I Subsidiary of firm I
Subsidiary
of firm J Parent of firm J
Country I Country J
Figure 4: Internal knowledge transfers and external knowledge spillovers
Source: own elaboration Central Research question
In order to meet the research aim and objective, the following central research question needs to be answered.
Research product
This research wants to give a first basic insight in how the phenomenon of spillovers is in Spain and then in particular how spillovers emerge between subsidiaries of Dutch firms and their Spanish stakeholders, why they emerge, what spillovers are between them, when this happens, etc. This research wants to lay down a profound first picture on the spillover phenomenon in Spain between Dutch and Spanish firms. In this way it lays a basis for a follow up research that will be done later.
Actors
Suppliers Clients Competitors Subsidiaries
3.3 Conceptual model One
Derived on the above stated research question, the following conceptual model can be framed. Conceptual model 1
Explanation of the model
Actors
The firms to which spillovers can flow consist of four parties.
As can be seen in the model a subsidiary of a Dutch firm has several linkages with its stakeholders. Based on literature and general insights there can be said that the main stakeholders of a firm are: suppliers, clients and competitors. These stakeholders all have certain specific linkages with the subsidiary. These stakeholders and the subsidiary together form the actors of the model. Spillovers flow from the subsidiary to these specific
stakeholders and back.
3.4 Research strategy and research model
In order to perform this research in a systematic way, a research strategy is needed. This project can be roughly divided into four phases (Verschuuren & Doorewaard, 1999). The
content of each of these and the necessity for successfully obtaining an answer to the research question will be discussed.
To explore and describe the spillover phenomenon an appropriate research tool is necessary. To come to such a tool, preliminary research is undertaken through which I will explore the phenomenon of spillover effects. This is the first stage of this research project. Here I will delve deeper into the subject by reading reports about the situation of the spillover effects in general and by conducting orientating interviews with experts (Embassy and experts). At the same time, academic literature on the spillover effects in general will be consulted to gain more insight into this specific area. The just mentioned orientating research activities interact. They can be seen as mutual
suppliers of ideas and insights.
The second stage, the perspectives of analysis will be derived from the studied
scientific literature on spillover effects. With the help of these perspectives of analysis, a suitable conceptual model will be developed to assist in the analysis. Since insight and understanding about a phenomenon increase as you interact with the data, multiple conceptual models will be used (Strauss & Corbin, 1990). Model one will eventually evolve into final model three.
In the third stage, this model will be applied to the research subject: subsidiaries of Dutch service firms in Spain. Here, the perspectives of analysis will be confronted and tested in reality within doing interviews. This way I will get the results of analysis required answering the main research question. The results are presented in stage three.
In the final stage, a conclusion will be drawn based on the results of the analysis. Figure 5 visualises schematically the process of the execution of this research.
Figure 5 Research model
Source: Verschuuren en Doorewaard (1999)
Theories on spillover effects Preliminary research Perspective of analysis and conceptual Model Interviews Results of analysis Conclusion Phase four Realization Phase one
3.5 Scope of the study
Spillovers in general
This thesis will focus on the spillover effects in general. According to the literature several different types of spillover effects exists, such as technology-, productivity- and knowledge-spillovers. The focus of this thesis will be a general one in such that these different types are all treated as the same. This is done because it is not necessary to differentiate between the different types, it will not have an influence on the outcomes of this research.
The type of entry mode
The type of FDI is the same as the type of entry mode of a firm to a certain market and this also implies the kind of relationship between firms. It is important to note the differences between these types. As stated in chapter one there are four types of FDI (Joint Venture, Acquisition, Merger or Greenfield). These four types can have different influences on the degree spillover effects.
- It has been argued that affiliates established through a Merger/Acquisition or a Joint-Venture are likely to source more locally than those taking from of Greenfield projects (UNCTAD) and (Muchielli & Jabour, 2003). While the latter have to take time and effort to develop local linkages, the former can take advantages of the supplier relationships established by the acquired firm or their local partner (Smarzynska, 2002).
- Jabour & Muchielli (2003) supposes that foreign affiliates that enter the host market through Mergers/Acquisitions or through Joint-Ventures will have a better knowledge of backward linkages opportunities with local suppliers than fully-owned foreign affiliates.
- Regarding the entry mode there can be said that foreign firms that enter a country through investments like a Greenfield, generate less linkages than firms who enter a country through a Merger/Acquisition (Mansfield & Romeo, 1980; Either & Markusen, 1996;Smarzynska, 2002).
So the type of investment does have an influence on the existence and intensity of
externalities. But this research will not make a distinction between the types of FDI. This is because these four types can influence the degree of spillovers differently. It would be out of the scope of this research to also take this into account.
Only FDI and no FII
This thesis will focus on the Direct Foreign Investment type. This is because this research focuses on Dutch firms that are already vested in Spain. This implies that they have entered Spain through FDI.
Conclusion
LITERATURE REVIEW
(CHAPTER FOUR)
Definition of terms
Vertical spillovers: Productivity spillovers taking place due to linkages between foreign firms and their local suppliers (Smarzynska, 2002).
Absorption capacity: The firm’s ability to identify, assimilate, and exploit knowledge from the environment (Narula, 2004).
Reminder
- Spillover effects are the overflow or transfer of knowledge and information (tangible and intangible) about assets such as management and organisational expertise, technology, entrepreneurship and access to markets (what).
- Spillover effects are the same as indirect effects of FDI. These effects are obtained thanks to the presence of foreign firms in domestic foreign markets and the influence these firms have on domestic firms (how).
Introduction
In this chapter we look at the existing literature review on the phenomenon of spillovers. This chapter is divided in seven paragraphs, which will respectively deal with the following issues: What are spillovers, Categories to which spillovers flow over, Influences on spillovers, Actors and process of spillovers, Forms of overflow, Determinants for the overflow. After that a new model, conceptual model 2 will presented.
Since the thesis is an exploratory research, each paragraph will end with a sub question and no hypotheses or propositions will be used (these are to test literature in reality). This thesis is not about testing theory but about exploring how all the aspects in the area of spillovers are between Dutch firms in Spain and Spanish firms. Altogether all the sub questions will form an answer to the main research question. In the next chapter case studies will be done to get an answer to the below proposed sub questions.
4.1 The phenomenon spillovers
Spillovers: effects who are obtained thanks to the presence of foreign firms and who would
not exist without them (Heijs, 2006).
These effects belong basically to the expanding of foreign firms. Spillovers can be seen as ways of influencing partners, competitors, suppliers, etc. These influences are twofold: 1) The overflow of knowledge (tangible and intangible)
2) The overflow of information.
A spillover effect is when one firm learns from another firm through the overflow of information and knowledge.
A spillover effect exist due to the presence of foreign firms on a local market (FDI)
Chapter 1
Background Chapter 3 Research Design
Chapter 4 Literature Review
Chapter 5
Methodology Chapter 7 Analysis Chapter 2
Basic Consideratio ns
Chapter 6
Spillovers take place when the entry or presence of multinational corporations affects
productivity, or other categories, of domestic firms in a host country and the multinationals do not fully internalize the value of these benefits (Smarzynska, 2003). According to the
literature, FDI generates some indirect effects resulting from the advantages that foreign firms have over domestic ones. These effects are based on the diffusion of their knowledge and technology. That’s why the indirect effects are seen in terms of transfer or international diffusion of its innovations in its broad sense. Meaning that it does not only include technology but also commercial and human capital capacities. It is also said that indirect effects include new technologies and organisational schemes necessary to transform the domestic productive structures (Muñoz, Roldan & Serrano, 1978).
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In this paragraph we have seen what spillover effects are in general and why they exist. But for this research I am interested in what the spillover effects are in Spain? More specifically: What and why are these effects between Dutch firms and Spanish firms operating on the Spanish market?
4.2 Categories
(To what categories do these spillovers flow over?)
A spillover effects is the learning of one firm from another firm by the overflow of information and knowledge. But what kind of information and knowledge flows over? In what kind of categories can these be divided? Below are several categories stated which are affected by the overflow of information and knowledge. The kind of category that is
influenced logically implies the type of information or knowledge that flows over to it. Spillovers have an influence on the following categories:
- Productivity - Technology - Management - Organisation - Marketing - Commercial ---
In this paragraph we have seen on what categories spillovers have an effect. But for this research I am interested in how this is between Dutch firms and Spanish firms operating on the Spanish market.
Research Sub question 1
What are the main spillover effects from subsidiaries of Dutch service firms venturing in Spain on their Spanish stakeholders, and vice versa?
Research Sub question 3
To what categories and what main category, do spillovers flow between subsidiaries of Dutch Research Sub question 2
4.3 Direct influences
(On what do these effects have an influence?) 1) The level of competition
2) The level of firm concentration
These two levels may improve or become worse through spillover effects flowing between two or more firms. The above stated categories will be described below.
1) The competition effect
The level of competition in the sector where foreign firms are active can be related with the existence and intensity of spillovers.
There can be argued that the entrance of foreign firms can generate positive externalities, which increase the competition. FDI increases the competition pressure which in turn is a drive for better mechanisation and capitalization of the productive systems of the national firms.
On the other hand, the effect can also be negative for the domestic firms in the case that they loose their market share and so cannot exploit or take advantage of scale advantages.
For example: The initial foreign investments creates a demand for local suppliers and improves their quality, productivity and product diversity. Hundreds of local firms enter to supply components or assembly services to MNE firms. This growth of component and other intermediate goods supply and productivity in turn creates a subsequent forward linkage effect to the final good producers, drawing in more MNEs and domestically owned firms. Then there follows a second round backward linkage effect and so forth. In some cases local firms eventually displaced the original MNE entrants.
Thus MNEs provide the initial impetus for industrialization, but the local industry that
develops creates sufficiently intense competition to eventually drive the MNE out again of the market (Markusen & Venables, 2003). This is known now as how FDI acts as a catalyst. FDI breaks down the equilibrium state in which a domestic market exists, which in turn implies that domestic firms need to take actions to protect their market shares and margins. As a result, the entrance of foreign firms in a monopolistic domestic - or protected - market can revolutionise the competition and a better assignment of resources. So this implies, in short term, that there exist externalities on the productivity and efficiency of the local firms (Blomstrom & Kokko, 1998).
The entry of an affiliate leads to a more severe competition in the host economy, so that local firms are forced to use existing technology and resources more efficiently or search for new, more efficient technologies (Blomstrom & Kokko, 1998).
Empirical evidence:
Fosfuri & Ronde (2003): the level of competition, measured by a concentration indicator (Herfindal Index) seems to increase the productivity of domestic firms.
Yokota (2003): the degree of competition between multinational and local firms explains the degree of benefits from FDI.
2) Effects of FDI and the firm concentration
foreign firms. One must not forget that foreign firms have certain marginal cost lower than domestic firms. This means, at short term, an absorption of the market shares of local firms. ---
In this paragraph we have seen how the level of competition and the level of firm
concentration can be affected by spillovers.. But for this research I am interested in how this is in Spain due to the spillover effects between Dutch firms and Spanish firms operating on the Spanish market.
4.4 Actors and types of linkages
Types of linkages between the foreign firm and the Spanish stakeholders. (To whom do spillovers flow over?)
There are several linkages through which spillovers flow over. Inter-industry linkages:
Vertical linkages (1)
Backward vertical linkages (A) Forward vertical linkages (B) Intra-industry linkages:
Horizontal linkages (2)
These linkages are intertwined with the kind of actors to which spillovers flow over. In general spillovers flow over to the actors stated below.
Suppliers (backward vertical linkages) Clients (forward vertical linkages) Competitors (horizontal linkages) 1) Backward and forward vertical linkages
Backward linkages arise from the MNEs affiliates’ relationships with suppliers, while forward linkages stem from contacts with clients. These forms are also considered as vertical
externalities. The spillovers occur when local firms benefit from the MNE affiliates superior knowledge of product or process technologies or markets (Blomstrom & Kokko, 1998). A) Backward vertical linkages
The entrance of foreign firms can generate two opposite effects. Positive:
- The generation of a market or a new demand intermediated by the foreign firm to the local suppliers implicate a positive effect.
- The foreign firm assists their local firms to adjust the quality and the costs of their products to the demands and requirements of foreign firms.
- The local suppliers help them to adopt their products at the local demands and preferences. The effect on the domestic economy is not only a better productivity of the local suppliers but also the rest of the national firms may benefit the better being of these suppliers.
Research Sub question 4
Negative:
-When the foreign firms attracts (or steals) the demand of the local firms and the local
supplier firms are not sufficiently competitive to exploit the foreign firms, they will generate a loss of the demand as intermediates and the lost of their local market (Markusen & Venables, 2003).
- More and more foreign firms substitute their local input for imported inputs (Aitken & Harrison, 1999).
B) Forward vertical linkages
Forward linkages are generated when local firms use the foreign firm as suppliers for their intermediate goods or for their buying of capital goods. Blomstrom (1991), says that the increasing complexity of the intermediate goods or capital goods implicate that only MNEs can execute the required R&D in order to generate machines and modern teams.
However there are not so many empirical studies about this subject and much evidence to ground this claim is missing.
2) Horizontal linkages
Horizontal spillovers: when local firms benefit from the presence of foreign companies in their sector. The influences of foreign firms on their competitors are horizontal effects. To the extent that domestic firms compete with MNEs, the latter have an incentive to prevent
technology leakage and spillovers from taking place (Smarzynska, 2002).
---In this paragraph we have seen through what kind of linkages and to whom spillovers flow over. But for this research I am interested in how this is between Dutch firms and Spanish firms operating on the Spanish market.
4.5 Forms/mechanisms
Spillovers flow over through the following ways: Demonstration
Imitation effects (Espionage and Learning) Copying
Mobility of the work force
Demonstration, imitation and copying effects
The ‘obligation’ that domestic firms need to take measures to protect their market shares holds in reality that the domestic firms need to improve. Imitation, copying and demonstration effects can help in achieving this (Blomstrom & Kokko, 1998). A lot of firms try to imitate or learn from the organisation structures or from the product innovations of foreign firms. Demonstration: Direct contact with users appears to be a principal factor explaining
technology diffusion. As the potential adopters come in contact with existing use (e.g. MNE affiliates), information about the technology is diffused, the uncertainty regarding the
advantages and disadvantages of the innovation are reduced, and the likelihood for imitation
Research Sub question 5
