Foreign Direct Investment, Technological Change, and Economic Growth within Europe

The extent of multinational activity and the share of world trade accounted for by multinational enterprises has risen steadily over the past two decades. This has led to renewed interest within Europe in the impact of multinational enterprises on employment, investment and trade, and the structure of economic growth. In this paper we discuss the factors behind the continued growth of foreign direct investment and its wider consequences on home and host economies. We report evidence on the impact of production relocation on the export performance of a number of OECD economies, and investigate the extent to which technology transfer from foreign‐owned firms has affected the rate of technical progress within the German and UK economies. The acquistion of firm‐specific knowledge‐based assets is found to be an important factor behind the growth of FDI, suggesting that such investments are likely to be an important channel for the diffusion of ideas and technologies.