Foreign Direct Investment and Labour Productivity in South Africa

The impact of Foreign Direct Investment (FDI) on domestically owned firms in developing countries has been a topic of much debate in the literature. The popular belief is that there is a substantial positive link between foreign investment and domestic enterprises. It has been argued that FDI provides access to advanced technologies and other intangible assets that can spillover to local manufacturing industries. Existing empirical studies in the area can be divided into two groups - one which concludes that FDI improves the productivity of domestic firms, and the other which argues that the impact is unclear or even negative. However, little is known about the effect of FDI on domestic firms in the African context. Noting this gap, this paper uses firm level unbalanced panel data from South Africa to examine the impact of foreign investment on labour productivity of domestic firms. The estimates presented here show that while foreign firms improve the productivity of their own workers, there is no evidence of either positive or negative spillover effect form FDI on productivity of labour in local firms at either the national or regional level. This finding is consistent with a meta analysis of the existing empirical literature on the topic. The meta analysis shows that the estimates of FDI spillovers are systematically affected by the specific research approach adopted. This paper conducts a detailed sensitivity analysis using alternative specifications and taking into account alternative definitions of foreign presence, but the results are robust and show that there is no effect of FDI on labour productivity in domestically owned firms. -- Relevance to Development Studies -- Unlike many previous researches regarding the spillover effects of foreign investment, this study gives due attention to different estimation concerns that might be a source of potential bias while analysing firm level data. It also points out some research design factors that could determine the findings in ex-ante stage using meta analysis. In addition, it classifies foreign presence based on ownership status and examines whether FDI spillover is geographically limited. Therefore, it contributes as alternative source of evidence for better understanding the relation between foreign investment and labour productivity of domestic firms in developing countries.