Foreign Direct Investment Motivation and Spillovers: The Swiss Case

During the past two decades, the current unprecedented rise of MNCs from southern economies has increased remarkably which has caused a fundamental shift in the global economy (UNCTAD, 2017). Southern MNCs expand overseas to seek sophisticated technology and to access resources for compensate their competitive disadvantages and enhance their capabilities (Mathews, 2006a; Luo and Tung, 2007). The idea is  in contrast to the implicit assumption in the general theory of internationalization, which assumes that resources are available in the firm’s home market (Dunning, 1988 and 1998; Dunning and Lundan, 2008).

The literature recognizes that southern MNCs are broadly motivated by seeking knowledge in European host economies. This catching-up process with MNCs from advanced economy which are certainly culturally different from southern MNCs, allows them to move as fast as possible from imitation to innovation by obtaining the appropriate lessons through repeated practices (Matthews, 2006a). In doing so, southern MNCs would develop new competences and technologies which could be a valuable source of knowledge for local European firms. In that knowledge tends to be highly tacit in nature and need to be decoded so as to be efficiently used by local European firms, raising their knowledge reservoir and productivity performance.

Generally, productivity spillovers can take place according to four main channels. Firstly, there are demonstration effects, local firms learn through imitation of technologies and skills from foreign MNCs (Kopecky and Koizumi, 1977; Findlay, 1978; Das, 1987). Secondly, there are competition effects following the entry and/or presence of foreign affiliates, which increases competition and forces local firms to work harder or absorb new technologies (Wang and Blomström, 1992; Perez, 1998; Nakamura, 2002). Thirdly, there are worker mobility effects when local workers who were previously trained by and/or worked in foreign affiliates may leave the firm to join an existing local firm or open a new one (Kaufman, 1997; Fosfuri et al. 2001; Glass and Saggi, 2002). Fourthly, the formation of vertical linkages when technology voluntary transferred from foreign customers (suppliers) to local suppliers (buyers) (Rodriguez, 1996; Markusen and Venable, 1999; and Linn and Saggi, 2005).
The literature has been largely concerned with analysis of spillovers and mostly focused on the effect from northern to southern/northern economies and despite the huge amount of existing theoretical and empirical studies, spillover effects on host countries from southern MNCs to northern economies are still not much analysed.

Following the papers of Ben Hamida and Khairallah (2014, 2016 and 2017), which are focused on studying the intra-industry spillovers effects from southern MNCs in Swiss service/construction firms, this study expands the analysis of spillovers effect from southern MNCs to test intra-industry and inter-industry spillovers, in both Swiss manufacturing and service/construction firms. This study is the first to explore the inter-industry level. It offers a more complete picture of FDI motivation intra- and inter-industry spillovers by including cultural dimension.
The aim of this thesis is thus to focus in detail on the potential role of FDI motivation as well as local absorptive capacity and cultural dimension in determining the size and the extent of possible intra- and inter- industry spillover benefits from southern MNCs. It hypothesizes that the size and the extent of such spillovers depend upon the interaction between the FDI motivations and the absorptive capacity of local firms. In addition, cultural distance between foreign and local firms is an important element in determining the size and the extent of spillover effects; spillovers are more likely to occur in culturally distant countries.

On the basis of these hypotheses, we test our theoretical arguments against empirical evidence for Switzerland using quantitative analyses. To the best of our knowledge, only Ben Hamida and Khairallah (2014, 2016, 2017) have explored the Swiss case. For the quantitative analysis, we made different regression estimations to assess the size and the extent of intra-industry and inter- industry spillovers.

Our empirical results seem to confirm our hypotheses for Switzerland, in which, only FDI with KE motive benefit from intra- and inter-industry spillovers. However, when considering local technological heterogeneity, high and low technology firms do not use the same pattern to benefit from the presence of southern firms in Switzerland. Only low technology local firms benefit from the presence of KE FDI at intra- and inter-industry levels, while high and low technology local firms benefit from the presence of KS FDI at intra and inter-industry levels. Our results demonstrate that cultural dimension is an important element in assessing intra- and inter-industry spillovers in Switzerland. Furthermore, the regression results demonstrate that only local firms that largely invest in the absorptive capacity benefit from spillovers, which result from the technology transfer and technology sourcing.