Online Appendix to Product Sophistication and Spillovers from Foreign Direct Investment

where i, j, and t are firm-, industry-, and time-specific subscripts. Yit is the output of firm i in year t in the form of total sales, and Y j is the corresponding geometric mean in industry j. xit denotes the use of factor z. We consider three factors of production, labor, capital, and material input costs. Labor input is measured by the total wage bill, capital by gross fixed assets, and material input costs by raw material expenditures. xj captures the industry-specific geometric mean of each factor. σ i = (α z i +α z j)/2, where α z i is the share of the factor z in output. σ i captures the average of the factor share in each firm i, and the geometric mean factor share of the corresponding industry j. Similarly, total factor productivity growth ∆LogTFPit is given by