Spillover and backward linkage effects of FDI: Empirical evidence for the UK

Recent work (including that of the author) on the impact of FDI has been based on micro-level (i.e. firms, establishments or plants) data, since this allows much greater control when examining such issues as whether FDI plants are more productive or innovative; whether there are spillovers to indigenous plants from FDI; and whether foreign-owned plants can facilitate the building-up of clusters. The traditional approach (which is still prevalent in the literature) considers whether those industries and/or regions with the greatest concentrations of FDI experience higher productivity, growth, spillovers, clustering affects, but such analysis does not tackle the issue of cause-and-effect and therefore amounts to little more than observing correlations between the growth of FDI in an industry/region and the overall growth of the industry/region. If FDI plants are attracted to co-locate with better performing industries and/or ‘regions’ (to benefit from potential spillovers themselves), then this does not amount to FDI necessarily being the source of greater economic benefits. Thus the purpose of this review paper is to report on the empirical evidence for the UK (recent and historical) specifically related to: (i) FDI plants – are they ‘better’ (i.e. have higher productivity, or more innovative, etc)? And predicated on whether FDI is better: (ii) are there spillovers from FDI? Lastly, (iii) are clusters established around FDI plants? The limitations of this evidence-base will also be discussed, and together with the results reported in the literature, this will allow us to set out some of the key research questions that need to be addressed in future empirical work, especially at the spatial level in the UK.