Catching-up to foreign technology? Evidence on the “Veblen–Gerschenkron” effect of foreign investments

The presence of foreign multinational enterprises may benefit local economies. In particular, highly productive foreign-owned firms may promote the technological catch-up of local firms. This channel of spillovers is defined as the “Veblen–Gerschenkron” effect of foreign direct investment and is analyzed in this article. Rather than the overall concentration of foreign-owned plants in a region or sector, it is their productivity advantage that determines the positive effect on domestic firms in geographical and technological proximity. We test this hypothesis using new firm-level data for German and Italian manufacturing firms during the 1990s. These two countries are particularly interesting due to the low productivity of domestic firms in some regions of East Germany and the Mezzogiorno. We find evidence of a significant (statistically and economically) Veblen–Gerschenkron effect which is robust to various ways of measuring the total factor productivity (TFP) of firms and to different empirical specifications.