Does inward foreign direct investment improve the innovative performance of local firms?

Over the past several decades, research in the fields of international business and strategy has devoted increasing attention to outward foreign direct investment (FDI). Despite extensive scrutiny of the firm-specific motivations for, and consequences of, outward FDI; we know relatively little about inward FDI, the impact of inward FDI on host country firms, and especially, how inward FDI affects the innovativeness of those firms. Extant theoretical arguments predict contrasting effects. One line of research highlights the benefits to host country firms. Another line of research highlights the deleterious consequences to host country firms. Utilizing data from 1799 Spanish manufacturing firms from 1990 to 2002, we investigate the relationships between industry-level and firm-level inward FDI and the innovative performance of host country firms. We find that FDI inflows into Spain are negatively associated with the ex post innovation of local firms. We contrast these findings with those using conventional measures of productivity.