Effect of Spillovers on Foreign versus Domestic Industry Leadership in a Developing Economy

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 the author focuses on. The author develops a formal model that compares the effect of different types of spillovers on industry leadership. The author finds 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.