Do Domestic Firms Learn to Export from Foreign-owned Firms? Evidence from Kenya

Attracting inflows of foreign direct investment (FDI) has been a major concern of most governments in developing countries. FDI is believed to bring many benefits to the host countries in terms of productivity, employment, and technology, among other benefits. This paper investigates the existence of export spillovers in Kenya for the period 2000-2005 using firm level panel data. More specifically, the paper analyses export spillovers in the manufacturing industry and the channels of transmission of such spillovers. Using a linear probability fixed effects model, the results show that foreign-owned firms may positively affect the decision of domestic firms to export through the demonstration effects. However, FDI could result in negative spillovers through the competition effects. There is also evidence of self-selection, where only the most productive firms venture into the export market. Therefore, policies aimed at encouraging firms increase their productivity will increase domestic firms’ participation in the export market.