Embodied and Disembodied Spillovers from FDI: Sectoral Evidence from Ireland

Using a distinctive sectoral dataset from Ireland, among the most attractive destinations of Foreign Direct Investment (FDI), over the period 2000 and 2018, we evaluate the role of embodied and disembodied spillovers in labour productivity. The paper fills substantial gaps in the literature on FDI-led productivity gains. First, we examine how (embodied) spillovers from different sourcing strategies of MNEs (material versus service linkages) affect the trajectory of sectoral productivity. Second, we evaluate the role of (disembodied) spillovers emerging from the intensity of foreign royalties and employee training. Third, we account in a relative manner for the absorptive capacity of domestic sectors, as a prerequisite for facilitating knowledge spillovers. Instead of purely measuring the level of human capital in the sector, we use the educational gap between domestic firms and Multi-national Enterprises (MNEs) in the same sector. After incorporating these new elements, the analysis shows that embodied spillovers through the material linkage are positively associated with domestic labour productivity (LP), nonetheless, gains vary substantially across segments of the productivity distribution. The service linkage impacts negatively unless sectors get close to the educational frontier. Our results are robust for selectivity bias offering ample space for policy design and intervention.