Tuesday, April 26, 2011

INSEAD Working Paper 2011/53/ST

An often contentious issue is how spillovers affect foreign versus domestic industry leadership in a developing economy, for instance, whether policies favour domestic firms. To address such issues it is important to understand the baseline effect of spillovers on industry leadership, which I focus on. I develop a formal model that compares the effect of different types of spillovers on industry leadership. I find that spillovers driven by absorptive capacity, versus by demonstration effects, are more likely to be contentious as domestic leadership is higher, outcomes are more sensitive to host country policies, and the firm dynamics, such as entry and exit, due to the spillovers are harder to observe. Thus baseline expectations of which firms lead an industry depend on the types of spillovers.