Foreign direct investment (FDI) represents an increasingly important dimension of international
economic integration with global FDI flows growing faster than output over the past two decades. FDI is a
particular form of investment, as it transfers knowledge as well as finance that may otherwise be
unavailable in the domestic economy. This paper uses firm-level data to identify FDI spillovers across
countries, sectors and time. The analysis suggests that knowledge-related spillovers from FDI vary
considerably across sectors. Services industries enjoy the strongest productivity-enhancing effects of FDI,
particularly through backward linkages. There is no strong evidence of horizontal productivity spillovers at
the aggregate level. The results also indicate a significant and positive correlation between the degree of
trade openness and output when measuring the impact of foreign presence in the domestic economy. A
positive interaction is found between trade liberalisation and productivity spillovers. Thus, trade
liberalisation can be seen as an important component of any reform package designed to help countries
maximise the benefits of FDI.
