Replication Data for Chapter 4: Foreign Direct Investment Spillovers, Corruption, and Local Firm Innovation

Governments in emerging economies often seek to attract multinationals’ foreign direct investments with the expectation that they generate positive spillovers through the introduction of innovations and best management practices. I argue that the potential of FDI to generate knowledge spillovers depends on the quality of the institutional conditions governing business transactions in the host country, in particular, corruption. Drawing on the knowledge-based view and transaction cost economics, I theorize that corruption weakens the positive influence of both horizontal and vertical FDI spillovers on local firm innovation, with the adverse effect more pronounced for vertical FDI spillovers. However, I propose that strong enforcement of laws against bribery abroad in the multinational firms’ home countries mitigates the harmful effects of corruption on the spillovers of FDI. I find support for these ideas using panel data on 10447 local firms based in 47 developing and emerging economies and first-difference models while instrumenting for FDI. My study contributes to the global strategy literature by highlighting the interplay between the host- and home-country institutional environments in shaping the innovation consequences of FDI in host economies.