Vertically Integrated Multinationals and Productivity Spillovers

How does the activity of foreign multinationals affect the competitiveness of local companies in the host countries? Previous studies have identified the interactions of domestic firms with foreign clients as main mechanism of diffusion of knowledge. However, backward productivity spillovers are not automatic. In this paper, we study how these externalities are affected by the strategy of vertical integration of foreign multinationals. Our analysis, based on firm-level data of European manufacturing companies, shows that local firms perceive weaker backward spillovers if client foreign affiliates are vertically integrated in their industry. The spillovers that arise from the activity of companies that do not invest in the domestic firms’ industry are 2.6 to 5 times stronger than the ones than come from affiliates of multinationals that invest in the industry of local firms.