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144 SUMMARY This paper examines how Foreign Direct Investment (FDI) impacts on productivity performance in host economy by raising and addressing two key questions: (a) To what extent does technological externality of FDI (FDI Spillover) rely on host economy’s skill deficiency characteristic before it can be generated and appropriated? (b) Is there a regional dimension to the level of spillovers from multinationals to domestic firms? Using establishment level data for the South African economy, we estimate regression equations for a representative sample of her manufacturing plants. Our findings reveal that regardless of the environmentally imposed skill deficit factor, foreign firms are able to generate productivity spillovers for their host. Successful diffusion to domestic firms is however mediated and significantly circumscribed by the skill factor. It also appears that some support exists for the claim that level of FDI spillovers to domestic firms relies on regional presence, i.e. closeness to the region in which foreign firms locate. INTRODUCTION For much of the developing world, the decade of the 1980s was a turning point in experimental economics as market pessimism gave way to measured optimism in development policy engineering. The abandonment of import substitution strategies that were principally influenced by the dependency and Neo-Marxist theories of earlier decades saw governments across the South adopting many of the neoliberal policies of open and free market orthodoxy. As a major pillar of this new economic model, attracting foreign direct investment (henceforth, FDI) into the local economy became a policy priority for many governments. Consequently, varieties of generous A Firm-Level Analysis of Technological Externality of Foreign Direct Investment in South Africa Abdelrasaq Al-Suyuti Na-Allah and Mammo Muchie CHAPTER 7 145 A FIRM-LEVEL ANALYSIS OF TECHNOLOGICAL EXTERNALITY OF FOREIGN DIRECT INVESTMENT IN SOUTH AFRICA investment incentive packages were developed by these governments in order to turn their economies into attractive destinations for investors. For South Africa, this has been especially the case since the dismantling of Apartheid and subsequent formation of the democratic government in 1994. With her new found status as an integrated member of the global economy, the country joined the club of FDI contestants through its pronounced Growth Employment and Redistribution (GEAR) strategy in 1996. Several inducement packages were introduced at both national and provincial levels of governments to foster the growth of national stock of foreign capital. Besides being a signatory to the Trade Related Investment Measures (TRIMS) Agreement as well as over 30 bilateral investment treaties that have, as priorities, increasing the national stock of FDI, there were, as at 2004, more than 35 investment incentive schemes in place across the country (Gelb and Black, 2004). A key motivation for these efforts by the South African authorities hinges around a widely held but controversially substantiated notion that there is a technological externality to FDI. Commonly referred to in the literature as FDI spillover, its proponents have argued that domestic economies in general and their firms in particular stand to reap technological reward from the activities of foreign multinationals (MNCs) operating in their countries. Despite the intuitive appeal of this claim, empirical analyses to date have yielded mixed results (Crespo and Fontoura, 2007). To improve our understanding on what currently appears to be an impasse some analysts have called for more detailed investigations that involve for instance, adopting an analytical framework which incorporates spillover promoting/inhibiting specific national factors (Lipsey, 2002), as well as employing appropriate data, that is generally considered to be panel data with disaggregation at the firm level (Gorg and Greenway, 2001). Past efforts at explaining the incidence of FDI spillover in South Africa have generally relied on aggregated country or industry level data to confirm its positive impact (Fedderke and Romm, 2006, Gelb and Black, 2004). However, it is now known that relying on results obtained with aggregated data at a macro as opposed to micro firm-level template may not provide an accurate understanding of FDI gains, especially if the observed positive impact at national or industry level also comes with negative distributional implications. For instance, it is quite possible that by virtue of location specific attributes such as agglomeration, productivity gains attributable to FDI at a more aggregative macro level only accrue to a subset of firms within the entire national population. Or even if all firms were to benefit, chances are also there that these benefits will not be evenly spread across board. A scenario of this sort presents a distributional distortion...

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