|Akinori Tomohara, Kazuhiko Yokota
While the literature has explored the relationship between FDI and productivity, a consensus has yet to be reached regarding FDI’s impacts on the productivity of domestic companies in host countries. This paper expands upon the findings of previous works by introducing endogenous input decision-making and vertical linkages across industries. The analysis shows that, on average, FDI improves domestic companies’ productivity through the horizontal and backward channels, but does not affect the increase in productivity of domestic companies through forward linkage. Additionally, the mechanisms of backward spillovers vary depending on industry’s structure.