¹Economics and Strategy Group, Aston Business School, Aston University, Birmingham, UK

Correspondence: JH Love, Economics and Strategy Group, Aston Business School, Aston University, Birmingham B4 7ET, UK. Tel: +44 121 204 3162; Fax: +44 121 204 3306; E-mail: j.h.love@aston.ac.uk

Received 18 November 2005; Revised 4 July 2006; Accepted 14 August 2006; Published online 29 March 2007.

Abstract

We develop a taxonomy that relates foreign direct investment (FDI) motivation (technology- and cost-based) to its anticipated effects on host countries' domestic productivity. We then empirically examine the effects of FDI into the United Kingdom on domestic productivity, and find that different types of FDI have markedly different productivity spillover effects, which are consistent with the conceptual analysis. The UK gains substantially only from inward FDI motivated by a strong technology-based ownership advantage. As theory predicts, inward FDI motivated by technology-sourcing considerations leads to no productivity spillovers.