Ann Harrison

Comments on Alfaro and Chen
Ann Harrison
Wharton, University of Pennsylvania
and NBER
May 2012
Goal of this paper
Does incoming FDI raise productivity in a
country because:
Incoming MNCS are more productive?
Incoming MNCS weed out inefficient
domestic firms?
Incoming MNCs transfer knowledge
(“spillovers”) to domestic enterprises?
Answer: all three (MNCs, spillovers,
and reallocation play a role)
Truly impressive theory and
empirical paper
• Alfaro and Chen use heterogeneous
trade theory to identify and distinguish
between different sources of productivity
changes due to MNC entry
• Million observations across many
countries, years (2002-2007)
• Detailed TFP estimation using OP and a
number of robustness tests
Some possible concerns
1. Endogeneity: can the tail wag the dog?
2. Are there knowledge spillovers or not?
3. Why don’t policies to encourage FDI
4. Minor issues (magnitude of effect,
direction of spillovers)
Usual question about causality:
• 1 million observations; 36,000 MNCs,
implying 3.6 percent of data
• Countries with more MNCs had higher
TFP growth
• But can the tail wag the dog? Aren’t
MNCs just attracted to more dynamic,
growing countries and industries?
Clever IV Approach: first stage
• Instrument for multinational entry in
the host country using productivity of
the multinational firm at headquarters.
• Other determinants of location of
subsidiary include distance (-ive), share
a border (positive) and share a
language (positive)
First stage R-square is low in Table 1,
suggesting instrument is “weak”. Can
we see F-statistics?
Can we see over-identification tests for
the validity of the instrument?
Can we see the OLS results without
Are there knowledge spillovers
from foreign investment?
Table 5:
Table 10:
NOT for developing countries
YES for developed but only vertical not
So what are we to conclude?
Why don’t policies to encourage
FDI help?
Table 11 suggests that tax incentives and
other pro-FDI policies reduce foreign entry
Clearly reflects the fact that incentives tend
to be introduced when a country is less
attractive to foreign investors
My suggestion: cut this part out and devote
a future paper to it once you resolve the
reverse causality problem (that less
attractive locations offer bigger incentives).
Authors estimate impact of 100 percent
increase in probability of MNC entry:
Direction of spillovers
• Assumed to move from MNCs to host
country firms
• Increasingly this assumption is violated,
especially for emerging market MNCs,
who travel in order to learn from their
host country counterparts:
CEMEX learns from Federal Express
Haier learns from US competitors
Emerging market MNCs in Silicon Valley
New evidence for China
China (Du, Harrison, and Jefferson)
Strong vertical (backward) linkages or
spillovers, disputing Table 10
Linkages increase post-WTO entry
Perhaps you used the US input-output
tables, and developing country inputoutput coefficients are different?
More significant knowledge spillovers in
subsidized sectors, disputing Table 11, and
suggesting Chinese did it right.
New evidence for India: FDI promotes
learning but not reallocation
Source: Harrison, Martin, and Nataraj, forthcoming
More hard evidence on IP (China)
IP instruments (tax incentives, tariffs,
subsidies) work better when there is
competition. (joint work with Aghion)
IP instruments work better when
targeted at exporting firms (joint work
with (Justin Lin)
BUT actual government targeting
limited so much scope for improvement.
Concluding Comments
Important work—on both theory and
estimation--disentangling the impact of FDI
on host countries.
Alfaro and Chen show us how to disentangle
impacts on productivity and procompetitive
effects of MNCs that weed out weak firms.
Summarizing suggestions:
More tests of validity of instruments
Are there spillovers ?
Do FDI policies help or hurt (cut Table 11)
Direction of spillovers and magnitudes
Thank you, and

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