Scholarly article on topic 'Innovation as a Driver of Absorptive Capacity from Foreign Direct Investment in Spanish Manufacturing Firms'

Innovation as a Driver of Absorptive Capacity from Foreign Direct Investment in Spanish Manufacturing Firms Academic research paper on "Economics and business"

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Abstract of research paper on Economics and business, author of scientific article — Pedro Sánchez-Sellero, Jorge Rosell- Martínez, José Manuel García-Vázquez

Abstract This article proposes a new model for analyzing innovation as a driver of absorptive capacity of spillovers from foreign direct investment (FDI) upon technical progress in Spanish manufacturing firms. So, we identify and justify innovation factors that determine the absorptive capacity from FDI upon technical progress. We group into four basic categories of innovation factors: research and development (R&D) activities and expenditures, R&D results, internal organization of innovation and external relationships of innovation. As a result of this study based on a panel data at the firm level, we demonstrate that local firms with process innovations and R&D activities (specially in internal activities) are in a better condition to absorb the spillovers from FDI. While, the obtaining of public finance destined for R&D is worse for such absorptive capacity.

Academic research paper on topic "Innovation as a Driver of Absorptive Capacity from Foreign Direct Investment in Spanish Manufacturing Firms"

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Procedía - Social and Behavioral Sciences 75 (2013) 236 - 245

2nd International Conference on Leadership, Technology and Innovation Management

Innovation as a driver of absorptive capacity from foreign direct investment in Spanish manufacturing firms

Pedro Sánchez-Selleroa' , Jorge Rosell- Martíneza'b José Manuel García-

Vázquezc

aUniversidad de Zaragoza, Zaragoza, 50018, Spain bCentro Universitario de la Defensa de Zaragoza, Zaragoza, 50090, Spain cUniversidad de Vigo, Vigo, 36310, Spain

Abstract

This article proposes a new model for analyzing innovation as a driver of absorptive capacity of spillovers from foreign direct investment (FDI) upon technical progress in Spanish manufacturing firms. So, we identify and justify innovation factors that determine the absorptive capacity from FDI upon technical progress. We group into four basic categories of innovation factors: research and development (R&D) activities and expenditures, R&D results, internal organization of innovation and external relationships of innovation. As a result of this study based on a panel data at the firm level, we demonstrate that local firms with process innovations and R&D activities (specially in internal activities) are in a better condition to absorb the spillovers from FDI. While, the obtaining of public finance destined for R&D is worse for such absorptive capacity.

© 22013 Published by Elsevier Ltd.

Selection and peer-review under responsibility of The Second International Conference on Leadership, Technology and Innovction Management

Keywords: Absorptive capacity; foreign direct investment; innovation; productivity; resources and capabilities and internationalization

1. Introduction.

Absorptive capacity is typically generated through conducting innovation (Cohen y Levinthal, 1989). The local capacity for absorption can be assessed by evaluating spillovers from FDI (Dimelis, 2005;

* Corresponding author. Tel.:+34-976-739556; fax: +34-976-739824. E-mail address: jrosell@unizar.es The authors acknowledge funding from MICINN-FEDER through the research project ECQ2009-09623

1877-0428 © 2013 Published by Elsevier Ltd.

Selection and peer-review under responsibility of The Second International Conference on Leadership, Technology and Innovation Management

doi: 10.1016/j.sbspro.2013.04.027

Girma, 2005). The results of such absorption are very hard to copy, so that a suitable handling of the process of absorption will constitute a competitive advantage for the firm (Peteraf, 1993). Previously, the effect of FDI and R&D on technical progress has been studied at the sector level in Spanish manufacturing (Rosell-M^inez Mid Sanchez-Sellero, 2012). Apart from that, (Barrios et al., 2004) studied the absorptive capacity of spillovers from FDI in Spanish manufacturing firms using the Survey of Business Strategies (ESEE). We update and extend these studies to the following innovation determinants of the absorptive capacity of spillovers from FDI in Spanish manufacturing at the firm level: research and development (R&D) activities and expenditures, R&D results, internal organization of innovation and external relationships of innovation.

To achieve the aims of this work, some questions must be posed: What is meant by a capacity to absorb FDI? What innovation factors determine this capability to absorb FDI and what effects do they have? On the basis of the aims proposed, the work is structured in the following way: the second section investigates the innovation factors in the capacity to absorb FDI, the third presents the models, data and methodology for explaining the innovation factors in the capacity for absorbing FDI. The final section involves a discussion of estimates.

2. Theoretical background and hypotheses

The capacity of firms to absorb the technical advances arising out of the spillovers from a foreign presence in their sector is analyzed on the lines suggested by authors such as (Findlay, 1978; Barrios et al., 2004). This capacity for absorption and the factors determining it began to be studied in depth by Lane and Lubatkin, 1998; Van den Bosch et al., 1999. This section explains the effect of innovation on absorptive capacity from FDI. So, we review the theoretical background and we propose some hypothesis.

The intensity of R&D, total intangible assets per worker and technological gaps can affect to local firms' absorptive capacity (Liu et al., 2000 and Dimelis, 2005). So, innovative effort can causes positive effects on absorptive capacity (Veugelers, 1997). This absorptive capacity is relevant to get new technologies that can spillover from FDI, having as a result an improvement in the productivity of local firms (Buckley et al., 2003; Caves, 1974). So, we propose the hypothesis 1 in table 1.

R&D expenditures imply the improvement of routines and processes in which innovation is assimilated and a firm's stock of knowledge is increased, thus improving its absorptive capacity (Mowery et al., 1996). In this line, R&D expenditures improve the absorptive capacity and may result to sustainable performance (Todorova and Durisin, 2007). As a consequence, see hypothesis 2 in table 1.

Patents held by the company is one of the firms efforts in innovation activities that determine the absorptive capacity (Nicholls-Nixon, 1993; Coombs and Bierly, 2006). On the one hand, the number and importance of patents benefits the absorptive capacity (Zucker et al., 2002). On the other hand, patents act against spillovers and the absorption of whatever has been patented. In addition, ownership of a patent by a local firm implies that it is exploiting this advantage and has no interest in making use of other innovations originating with other firms. In view of all this, we put forward the hypothesis 3 in table 1.

Absorptive capacity of technology by way of learning and investment efforts can be measured through innovations in products and in processes made by such firms (Ben Hamida, 2007). Some studies such as (Murovec and Prodan, 2009) don't provide proofs for confirming that product and process innovation improve absorptive capacity. However, if there is a greater quantity and quality of external technological

knowledge then is higher the absorptive capacity of product and process innovations (Cohen and Levinthal, 1990). The process of development of new products improves the absorptive capacity and this capacity has a positive effect on the efficiency and on the productivity (Stock et al., 2001). We sum up the behaviours of product innovations and process innovations through the hypotheses 4 and 5 in table 1.

The transfer of information makes easier the absorptive capacity (Van den Bosch et al., 1999). To maximize this communication, the firm must design flexible formal and informal organizational structures (Liao et al., 2003), it must create multidisciplinar teams and close links between the R&D department and the other departments (Gupta and Govindarajan, 2000; Meeus et al., 2001) and it must favour the coordination capabilities of innovation (Jones and Craven, 2001). All of these tools of the internal organization of innovation affects to the absorptive capacity through organizational learning on the creation of sustainable competitive advantage (Lane et al., 2001; Tsai, 2001). To sum up, we formulate the hypothesis 6 in table 1.

An organization with strong and structured internal R&D activities is better equipped to absorb the spillovers (Lowe and Taylor, 1998). Also, external R&D activities increase absorptive capacity, but only if an organization already possesses its own prior absorptive capacity (Griffith et al., 2004). So, the aforementioned external R&D activities strengthen the absorptive capacity of spillovers from FDI (Lowe and Taylor, 1998). On the base of these arguments, see hypothesis 7 in table 1.

The effect of public funding for R&D of firms on absorptive capacity presents different results in the literature (David et al., 2000). So, some find positive effects of public funding for R&D of firms (Aerts and Schmidt, 2008) and others find insignificant or negative effects (Lach, 2002). The advantages of public funding for R&D are the increase of investment level and the improvement of organizational capacities (Trajtenberg, 2001). However, public funding of firms' R&D expenditure is less effective than private funding (Griliches, 1986). In sort, we propose the hypothesis 8 in table 1.

Firms' involvement in innovation collaborations with various outside parties (e.g., suppliers, clients, competitors, universities, research and technology centers, engineering and consultancy businesses) enriches their knowledge base and develops a better ability to assimilate and exploit external knowledge (Kostopoulos et al., 2011). Furthermore, this absorptive capacity improves thanks to the external technological collaboration such as R&D agreements (Fabrizio, 2009), close relationships with buyers and suppliers for innovation (Cohen and Levinthal, 1990), among other things. Hence, we put forward the hypothesis 9 in table 1.

Public policies may take decisions in favour of innovation in local firms, so that they will improve their absorptive capacity for FDI spillovers. As a consequence, these government measures may include stimulating the entry of FDI, promoting investments, adjusting regulations on the concession of patents, conceding tax incentives (Dunning and Gugler, 2008), supporting private enterprises, but also universities, research centers and industrial associations, and so forth (Padilla-Pérez, 2008). So, the ability of firms to collaborate with public sector in innovation gains advantage in developing absorptive capacity (Zucker et al., 2002; Fabrizio, 2009). Consequently, see hypothesis 10 in table 1.

Absorptive capacity from FDI in Spanish manufacturing firms is affected by innovation and by other determinants. In fact, these other determinants act as a control variables, because they let us to explain the role of innovation in this context. We include the following control variables: quality of human capital, the complexity of the business, the family management of businesses and the market concentration.

Table 1.: Hypothesis

Hypothesis 1: R&D activities of local firms improve its absorptive capacity of spillovers from FDI.

Hypothesis 2: Absorptive capacity of spillovers from foreign presence increase in the same direction as the R&D expenditures.

Hypothesis 3: There is a relationship between the ownership of patents by local firms and the absorptive capacity of spillovers from FDI.

Hypothesis 4: Product innovations have a positive effect on the absorptive capacity of spillovers from a foreign presence. Hypothesis 5: Process innovations increase the absorptive capacity of spillovers from foreign firms.

Hypothesis 6: The greater the number of actions of internal organization of innovation, the greater will be the absorptive capacity of spillovers from FDI.

Hypothesis 7: External R&D activities favour the absorptive capacity of spillovers from FDI.

Hypothesis 8: There is a relationship between public funding of R&D achieve by local firm and its absorptive capacity of spillovers from a foreign presence.

Hypothesis 9: Absorptive capacity of spillovers from a foreign presence increase in the same direction as the external collaboration for innovation.

Hypothesis 10: The greater the relationships with the public sector in innovation, the greater will be the absorptive capacity of spillovers from a foreign presence.

3. Model, Data and Methodology

This paper analyses homogenous information at the individual firm level for 20 manufacturing sectors over a period of 13 years, from 1994 to 2006. The source of information is the Survey of Business Strategies (ESEE) from the Spanish State Industrial Holdings Company (SEPI). We take into account 327 firms and 1288 observations. Data on prices come from the Industrial Price Index (IPRI) by the Spanish National Statistics Institute (INE).

We include in a production function the effect of foreign capital participation and foreign presence in a sector upon added value (output). In addition, we introduce variables that arise from the interaction of a foreign presence in a sector with other variables. These combined variables contain the determinants of absorptive capacity from the foreign presence in the sector. Among them are the innovation determinants.

Ln(VAu) = a + ß0ln(VA1)t_i) + ßiln(CLAB1>t) + ß2ln(CAPu) + ß3ln(NLABlt) + ß4PAR1t + ß5PREu + ß6RDAlt + ß7RDCu + ßsNPATu + ß9INPRD1t + ß10INPRCu + ß„INTORG1t + ß12ERDAu + ß13PUBFNDu + ß14EXTCOL1t + ß15RPUBu + ß16SLAB1t + ß17DIFPu + ß18PROC1t + ß19FAMI1t + ß20CMK1t + ß21RDA*PREu + ß22RDC*PREu + ß23NPAT*PRE1t + ß24INPRD*PRE1t + ß25INPRC*PRE1t + ß26INTORG*PREu + ß27ERDA*PRE1t + ß'28PUBFND *PRE1t + ß29EXTCOL*PRE1t + ß30RPUB*PREu + ß31SLAB*PRE1t + ß32DIFP*PRE1t + ß33PROC*PRE11 + ß34FAMI*PRE1t + ß35CMK*PRE1t + £ ßs SECTU, + Ei,t ' ' ' ' ' (1)

where, a is the natural logarithm of technological level, VA is output, CLAB is the cost of the input labour, CAP is the servicing of capital input, NLAB is the servicing of the labour input, PAR is the percentage of direct or indirect participation by foreign capital in the firm's company capital, PRE is the foreign presence in the sector, RDA indicates if R&D activities were carried out internally or externally, RDC is the natural logarithm for the figure for R&D costs divided by the stock of capital, NPAT is the number of patents, INPRD are innovations in products, INPRC are innovations in processes, INTORG is

the internal organization of innovation, ERDA indicates if R&D activities were carried out externally, PUBFND is the amount of public funding for R&D divided by total R&D costs, EXTCOL is external collaboration in innovation, RPUB is the relationship with the public sector in respect of innovation, SLAB is the total of graduate engineers and other degree holders employed, FAMI indicates if a family group participated actively in the control or management of the enterprise, DIFP indicates if the products manufactured by the firm were differentiated or standardized generic items, PROC is the complexity of the production process, CDOM is concentration in the principal (domestic) market, £ PS SECTit,s in this summation, SECTi t s has the value one if firm i in year t belonged to sector 5, in any other case, it is zero, the coefficient pS represents the effect associated with sector 5 elt is the error term, errors are taken to be independent and identically distributed.

We allow for persistence in value added by specifying a dynamic production function including the lagged value of VA as a regressor. Estimation for this dynamic panel data is carried out by the Generalized Method of Moments (GMM) proposed by Arellano and Bond (1991), which provides a consistent estimation in the presence of heteroscedasticity of unknown form. This model is consistent with theoretical contributions and the empirical evidence emerging from the studies by (Blundell et al., 1999; Aghion et al., 2005 and Girma et al., 2009). Table 2 provides descriptive statistics for the variables of expression (1) to facilitate the interpretation of the regression results.

4. Estimation and Discussion

All the estimators of expression (1) are obtained from Stata 9.0, and are shown in Table 3. In addition, Wald test indicates that the global significance of the model is high. Differentiated residuals behave is white noise, and the Sargan test allows to accept the restrictions of over-identification, so that the model has a good explanatory capacity. We comment below the estimated model coefficients (Table 3):

The intercept and the lagged endogenous are statistically equals to zero. The estimation gives slightly decreasing returns to scale because the sum of the coefficient of labor (0.691) and of capital (0.147) is (0.84). The control variable labor cost presents a highly significant positive link (0.45) with value added.

The estimation result of the control variable percentage of foreign participation is according to previous studies such as Rosell-Maránez and Sánchez-Sellero, 2012 because we show that foreign direct investment has a positive and a greater effect on productivity than those whose capital is predominantly local in the manufacturing sector. The positive influence of foreign participation (PAR) allows us to interpret the foreign presence variable (PRE) and the variables constructed by multiplication with foreign presence (PRE). In other words, this estimated coefficient for the foreign participation lets us to identify a firm and isolate its absorptive capacity, and the innovation determinants of absorptive capacity from foreign direct investment in manufacturing firms in their sector. For its part, foreign presence in the sector (PRE) can be zero. Therefore, the variables constructed by multiplying this variable, foreign presence (PRE), by others explain the determinants of absorptive capacity from foreign presence in the sector. Among these determinants we recognize innovation and others such as quality of human capital, family management of businesses, complexity of business and market concentration. These factors act as a control variable because our focus is the innovation determinants. We analyze in the following lines the estimated coefficients for the variables that serve to explain the innovation as a driver of absorptive capacity from foreign direct investment in Spanish manufacturing firms.

The variable derived from multiplying R&D activities by foreign presence in the sector presents a positive coefficient of 0.15 on technical progress, highly significant. Hence, hypothesis H1 can be accepted, which indicate that the absorptive capacity from a foreign presence in the sector is improved by R&D activities.

The natural logarithm for R&D costs divided by the capital stock (RDC) is included in a redundant manner in the production function. This investment is accounted in the capital input, estimated as a stock (a proxy for capital service). The measurement of R&D expenditures in the Survey of Business Strategies explains our specific result: which takes them into account only when they are included as fixed assets. That happens when innovation has been real, effective and valuable. Furthermore, firms that use FDI entry mode to access Spanish localization site their technology centers outside that country. So, foreign capital participation attracts technological assets and the variable R&D cost does not include what has been spent outside Spain. The fact that our estimated coefficient for the variable natural logarithm for R&D expenditure divided by the stock of capital (RDC) has no effect on technical progress implies that its elasticity of output is similar to the rest of the assets. Also, these reasons also go to show that there are no proofs to confirm hypothesis H2, since the estimation result that shows no effect from R&D expenditure on local absorptive capacity from FDI. This result for the firm level is similar to previous study for the sector level in Spanish manufacturing firms (Rosell-Martinez and Sanchez-Sellero, 2012) because we do not find a positive effect of R&D expenditures on technical progress.

The variable representing the interaction of the number of patents (NPAT) with foreign presence (PRE), can have no significant effect on technical progress. Thus, there is not relationship between the ownership of patents by a local firm and absorptive capacity from a foreign presence, so that the hypothesis H3 cannot be accepted. Despite this, we include in production function because if local firms holds patents then they can exploit this advantage, that it is difficult for others to appropriate it, that its privacy is improved and that there is no interest in making use of innovations or improvements arising in other firms.

The variable involving interaction of product innovations (INPRD) with foreign presence in the sector (PRE) has a nil effect on technical progress. Thus, the possession of novel products has no effect on absorptive capacity of spillovers from FDI in Spanish manufacturing firms, so that there are no proofs to confirm hypothesis H4. The explanations that might lead to these results could lie in the fact that the absorptive capacity from FDI in Spanish manufacturing firms is focused in items other than products.

The coefficient of interaction of process innovations (INPRC) with a foreign presence in the sector (PRE) on technical progress is positive, with a value of 0.0465 and with moderate significance, allowing hypothesis H5 to be accepted. So, this process innovations due to their positive effect on technological knowledge, favor the absorptive capacity from foreign presence in the sector.

The interaction of internal organization of innovation (INTORG) with a foreign presence (PRE) is statistically equal to zero. This is why we have no proofs to confirm hypothesis H6. Thus, internal organization of innovation is irrelevant to absorptive capacity from FDI in the sector. The motives of these results might be that Spanish manufacturing firms have many and varied modes of internal organization of innovation.

On the other hand, the interaction of such external R&D activities (ERDA) with a foreign presence in the sector (PRE) has a significant negative coefficient of 0.12 on technical progress. This negative

coefficient does not permit acceptance of hypothesis H7 according to the beneficial effects of external R&D activities on the absorptive capacity of spillovers from FDI. We argue that the estimation result of this hypothesis H7 (externalized R&D activities are prejudicial for the absorptive capacity of spillovers from a foreign presence) and for hypothesis H1 (R&D activities favor a absorptive capacity of spillovers from such a foreign presence) may be interpreted as showing that internal R&D activities are more favorable for the absorptive capacity of spillovers from a foreign presence in the sector, while such activities affect it negatively when externalized.

The variable multiplying public R&D funding (PUBFND) with foreign presence in the sector (PRE) presents a negative coefficient of -11.92 with moderate significance of 0.05. This is why there is a relationship between such public financing of R&D undertaken by local businesses and the absorptive capacity of spillovers from a foreign presence, allowing hypothesis H8 to be accepted. In particular, our results show that public funding of R&D is prejudicial for the absorptive capacity of spillovers from a foreign presence. If this estimation result is considered jointly with the fact that public financing of R&D is less effective than private (Griliches, 1986), we can conclude that firms that obtain private financial resources for R&D are in a better position to absorb spillovers from FDI in their sector.

The influence of the variable multiplying the external collaboration for innovation (EXTCOL) with foreign presence (PRE) on technical progress is nil. In this way, external collaboration for innovation does not affect on the absorptive capacity of spillovers from foreign presence and we have no proofs to confirm hypothesis H9. It occurs due to local firm advantages achieved thanks to the external collaboration for innovation might be a motive to lose interest in absorbing spillovers from FDI.

The interaction of relationship with the public sector in innovation (RPUB) with foreign presence (PRE) can have no significant effect on technical progress. For this last reason, there is not linkage between the public sector in innovation and the absorptive capacity of spillovers from foreign presence, and it doesn't let us to confirm hypothesis H10. This may be so because when local firm is already exploiting the advantages that the relationship with the public sector in innovation gives and has no interest in making use of others coming from other firms.

Table 2: Descriptive Statistics

Variables Mean S. D. Minimum Maximum Variables Mean S. D. Minimum Maximum

(ln(VA))t 15.6663 1.4487 12.0692 19.838 (INTORG)t 1.4371 1.4873 0 4

(ln(CLAB))t 10.2569 0.2606 9.3529 11.4334 (ERDA)t 0.4115 0.4923 0 1

(ln(CAP))t 15.6291 1.5524 11.8256 20.1056 (PUBFND)t 0.0002 0.0021 0 0.06

(ln(NLAB))t 4.9261 1.3668 1.7918 8.9785 (EXTCOL)t 1.8362 1.9135 0 8

(PAR)t 30.4992 44.4693 0 100 (RPUB)t 0.1949 0.4615 0 2

(PRE)t 0.5414 0.2563 0 0.9635 (SLAB)t 7.1797 9.1274 0 74.5

(RDA)t 0.6079 0.4884 0 1 (DIFP)t 0.5023 0.5002 0 1

(RDC)t 0.0362 0.0739 1.7e-10 0.7351 (PROC)t 2.1654 1.4802 0 5

(NPAT)t 1.4984 10.9665 0 190 (FAMI)t 0.3051 0.4606 0 1

(INPRD)t 0.8727 1.3648 0 4 (CMK)t 35.2011 35.293 0 100

(INPRC)t 0.6514 0.8043 0 2

Table 3: Regression Results.

Dependent Variable: (ln(VA))t Coefficient p-value Dependent Variable: (ln(VA))t Coefficient p-value

(a)t -0.0011 0.744

(ln(VA))t-i 0.0829 0.310 (ln(NLAB))t 0.6909 0.000***

(ln(CLAB))t 0.4501 0.000*** (PAR)t 0.0007 0.084*

(ln(CAP))t 0.1467 0.000*** (PRE)t -0.0826 0.184

(RDA)t -0.0338 0.373 (RDA)t * (PRE)t 0.1458 0.018**

(RDC)t -0.3107 0.328 (RDC)t * (PRE)t 0.3952 0.341

(NPAT)t 7.09e-06 0.993 (NPAT)t * (PRE)t -0.0001 0.917

(INPRD)t 0.0075 0.446 (INPRD)t * (PRE)t -0.0108 0.439

(INPRC)t -0.0278 0.086* (INPRC)t * (PRE)t 0.0465 0.061*

(INTORG)t -0.0072 0.600 (INTORG)t * (PRE)t 0.0029 0.887

(ERDA)t 0.0544 0.177 (ERDA)t * (PRE)t -0.1219 0.042**

(PUBFND)t 8.6408 0.060* (PUBFND)t * (PRE)t -11.9201 0.050*

(EXTCOL)t 0.0053 0.656 (EXTCOL)t * (PRE)t -0.015 0.405

(RPUB)t 0.0357 0.256 (RPUB)t * (PRE)t -0.0777 0.114

(SLAB)t -0.0005 0.720 (SLAB)t * (PRE)t 0.0016 0.500

(DIFP)t 0.0096 0.734 (DIFP)t * (PRE)t 0.0182 0.685

(PROC)t -0.0191 0.058* (PROC)t * (PRE)t 0.0299 0.030**

(FAMI)t --- --- (FAMI)t * (PRE)t -0.0977 0.098*

(CMK)t 0.0003 0.489 (CMK)t * (PRE)t -0.0004 0.557

Sector Coefficients Yes ---

Wald Test 975.16 --- First-Order Serial Correlation -4.13 0.0000

Sargan Test (Chi squared) 72.33 0.2489 Second-Order Serial Correlation 1.40 0.1620

Notes: Figures con *, ** and *** indicate a level of significance of 10%, 5% and 1% respectively.

5. Concluding Remarks.

We study absorptive capacity of spillovers from FDI and we include as a driver of such absorption, organizational characteristics of local firm in relation to its innovation in the context of Spanish manufacturing sector. For this study, we use data that come from the Survey of Business Strategies and we estimate a model based on a production function to explain the innovation factors determining the absorptive capacity of spillovers from FDI on value added. So, we perform a GMM estimation for panel data at the firm level in 20 industries over 13 years.

The aforementioned production function contains the effects of the participation of foreign capital and of a foreign presence on value added. Moreover, this production function adds other explicative variables such as R&D activities and expenditures, R&D results, the internal organization of innovation and the external links for innovation. Also, it includes the combination of each of these items with foreign presence. These combinations are the innovation factors for the absorptive capacity of technical progress

through spillovers from FDI, except other absorptive factors which act as a control variables. Next lines present the main results of such innovation factors.

On the one hand, R&D activities boost the generation of new knowledge and improve the capacity to absorb technical progress from the spillovers of FDI. Within these, internal R&D activities have the most positive impact, whilst externalized activity could even have a negative effect. In relation to the origin of resources, it may be noted that the firms that achieve private financial resources for R&D are more capable of absorbing such spillovers from FDI than firms that manage public financial resources for R&D. On the other hand, as firms that carry out FDI usually have more innovatory processes than local firms, then those local businesses can gain more from foreign enterprises when their production processes are more similar. As a result, a innovatory production process makes more and better tools available for absorbing the spillovers from FDI.

Finally, there are opportunities for further research to contribute to the growing literature. The first could be an explanation of spillovers from FDI and the capacity to absorb them in the context of the vertical relationships of industries and businesses, that is, with suppliers and clients. The second could be a study of the spillovers and the absorptive capacity from FDI depending on the geographical location of foreign firms relative to local companies.

Acknowledgements

The authors acknowledge the funding received from MICINN-FEDER through the research project ECQ2009-09623.

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