The impact of foreign direct investment on local firms: Western firms in emerging markets

This study focuses on the impact of foreign direct investment (FDI) on local firms in host economies. We examine both backward and forward linkages and their effects on domestic firms. Data collection was undertaken over a three-year period whereby qualitative in-depth interviews were carried out with senior managers in UK headquarters, subsidiaries and 'linked' local firms in order to facilitate a multi-perspective approach to examining this topic. Results indicate that linkages do exist, contrary to earlier belief. The main factors which facilitate linkage formation were found to be subsidiary-related variables, mainly the mode of entry into the local market, subsidiary autonomy, level of embeddedness and subsidiary role. It was also found that government regulation and policy had some impact on the formation of linkages. Over time the impact on local firms was found to be positive with increased employment, productivity and significant upgrading of skills and competencies. The key contribution of this chapter is to extend the literature on linkages to consider services while developing a conceptual framework in this area. Overall, our study confirms the importance of the subsidiary in linkage formation and also shows how the externalities occurring from linkage formation in the service sector may benefit local firms and subsequently aid local economic development as a whole.