Abstract:
Research shows that foreign direct investment (FDI) yields positive spillovers in host nations through opportunities for learning and productivity improvement. Low income countries particularly benefit from spillovers. Nevertheless, credible studies of a few countries have reported negative spillovers, a surprising finding that needs explanation. By examining conditions in these countries during periods when negative spillovers were recorded, this study found that pervasive turbulence, including severe institutional challenges were a common factor. The study predicted that negative spillovers occur when host nations are characterized by economic and institutional turbulence; and that a large performance gap between local and foreign firms could explain the negative spillovers. Using the literature on MNCs’ exit from conflict-ridden contexts, the study suggests that MNCs may seek to remove as many value-adding activities from the host location as possible, even while maintaining a physical presence there. As the very terms “horizontal” and “vertical” spillovers suggest, spillovers take place because MNCs are in some way connected to the local economy. Even when MNCs may not physically exit a location, turbulence will likely result in them reducing their connectedness to the local economy. MNCs instead turn to intra-organisational arrangements, i.e. access relationships with the parent and sister subsidiaries to borrow important resources needed to keep afloat. The disconnection from the local economy results in a large performance gap between local and foreign firms, ultimately leading to negative spillovers. This study uses resource dependence theory’s intra-organisational relationships to explain the large performance gap. The study polled the manufacturing industry in Zimbabwe, a low income country that once recorded positive spillovers in an era of economic and institutional stability, but is now grappling with a turbulent economic and institutional environment. The empirical results are consistent with the study’s predictions, spillovers are negative. The results suggest that in such turbulent environments, domestic-firms oriented policy and stabilisation of economic and institutional structures to improve the absorptive capacity of local firms may be more useful than FDI-led development. By providing evidence from an understudied context, the study underlines the importance of a non-turbulent local environment as a precondition for realizing the benefits from FDI plants. The study also foregrounds resource dependence theory – via access relationships– as a useful lens for understanding the mechanism behind spillovers in a turbulent economic and institutional environment.
