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Local Linkages: The Interdependence of Foreign and Domestic Firms

This paper investigates the interdependence of foreign and domestic firms’ local linkage decisions and the extent to which they respond differently to variations in export intensity and productivity originating from each of the two groups of firms. Our empirical analysis, based on Irish data, uncovers an interesting asymmetric pattern in the local linkage dynamics of foreign and domestic firms. We find that local linkages of domestic firms tend to evolve independently of their foreign counterpart, and that they react almost instantaneously to exogenous events such as increases in export intensity or productivity. Local linkages of foreign firms, by contrast, react gradually to exogenous events and the impact works through the reverberating dynamics of the lagged linkages of both foreign and domestic firms. The Irish experience is instructive to policymakers in emerging markets who are naturally interested in the best way to maximize the value of FDI, in terms of benefits the latter brings about for sustainable economic development.