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We quantify foreign direct investment (FDI) spillovers by comparing changes in total factor productivity (TFP) among domestic plants in districts that attracted a large greenfield foreign plant and districts where greenfield FDI was licensed but not yet operational. Treated and untreated districts have similar trends in TFP prior to the opening of the large greenfield foreign plant. Over the four years starting with the year of the opening, TFP of domestic plants is 8% higher in treated districts. Using an alternative identification strategy that exploits the assignment of land for FDI by the Ethiopian Government, we obtain similar results. Foreign plants also attract new economic activity to treated districts. Exposure to foreign firms enhances domestic firms': (i) production processes; (ii) managerial and organizational practices; (iii) logistics and; (iv) knowledge about exporting. Knowledge transfer is more likely among labor or vertically linked firms but also occurs outside these channels.
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We use a plant level survey to identify interactions between domestic plants and foreign direct investment (FDI) in Ethiopia's manufacturing sector. One third of Ethiopian plants are linked to FDI through labor sharing, supply chains and competition. Technology upgrading most commonly occurs as a result of competition in output markets and observation and imitation of FDI in the same line of business. Other benefits include enhanced managerial practices and knowledge about exporting. Spillovers from FDI are identified by comparing changes in total factor productivity (TFP) among domestic plants in districts where a large greenfield foreign plant produces and districts where FDI in the same industry and around the same time was licensed but not yet operational. Over the four years starting with the year of the FDI opening, the TFP of domestic plants is 11 percent higher in treated districts, employment in domestic plants increases and more domestic plants open.
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