Foreign Investment Boosts Sophistication of Domestic Manufacturing: New Evidence from Turkey

By Beata Javorcik (University of Oxford), Alessia Lo Turco, (Marche Polytechnic University), Daniela Maggioni (University of Catania)

Recently, there has been a renewal of interest in industrial policy across the world. Advanced economies promise to use industrial policy to revive their declining manufacturing, while emerging markets hope that industrial policies will help them upgrade their production structure and in this way stimulate economic growth. Yet, little is known about the micro determinants of product upgrading.

The existing research suggests that inflows of foreign direct investment (FDI) can foster host countries’ production upgrading, where upgrading is measured in terms of the unit values of exports (Harding and Javorcik,  2012).[1]

In our recent work, we move away from unit values – a highly imperfect proxy for product quality –  and examine the link between FDI and product upgrading, as captured by complexity of new products introduced by domestic firms.[2] We focus on manufacturing firms in Turkey, a country that has experienced a spectacular surge in FDI inflows during the 2000s and dramatically increased the sophistication of its productive structure in the last decades.[3]

Anecdotal evidence

Anecdotal evidence suggests that foreign affiliates stimulate product upgrading among their suppliers. For example, Indesit Company, an Italian white good producer – recently acquired by Whirlpool – has produced refrigerators in Turkey since the 1990s. In 2012, Indesit built a new plant to produce washing machines. To become a supplier of this new plant, a local company purchased new presses and automated its production process. This allowed it to start producing a new and more sophisticated product, a washing machine flange, and to increase efficiency and production volumes. The flange is a very complex product as it needs to be produced with no aesthetic defects by an 800-1,000 tonne metal presses. It also needs to withstand the stress of between 1,000 and 1,400 revolutions per minute while remaining within a certain range of vibration and noisiness. Indesit has shared essential tacit knowledge, information processes, instructions and control procedures with the local company, thus stimulating and supporting the supplier’s complexity upgrading.

Inspired by the anecdotal evidence, our study examines the link between the presence of foreign affiliates and production upgrading by Turkish firms located in the same region and active in the input-supplying industries.

Measuring product complexity

To capture product complexity we use a measure proposed by César Hidalgo and Ricardo Hausmann, who relate the concept of product complexity to the extent and exclusivity of capabilities needed to produce a given product.[4] It is easiest to explain this measure using a Lego analogy. Think of a country as a bucket of Lego pieces with each piece representing the capabilities available there. The set of products (i.e., Lego models) a country can produce depends on the diversity and exclusiveness of the Lego pieces in the bucket. A Lego bucket that contains pieces that can only be used to build a toy bicycle probably does not contain the pieces to create a toy car. However, a Lego bucket that contains pieces that can build a toy car may also have the necessary pieces needed to build a toy bicycle.  While two Lego buckets may be capable of building the same number of models, these may be completely different sets of models. Thus, determining the complexity of an economy by looking at the products it produces amounts to determining the diversity and exclusivity of the pieces in a Lego bucket by simply looking at the Lego models it can build.

Our findings

Our analysis suggests that the presence of foreign affiliates does not affect the propensity of Turkish firms to innovate. However, the presence of foreign affiliates is positively correlated with the complexity level of products newly introduced by Turkish firms active in the supplying industries and located in the same region.

The estimated effect is economically meaningful. A 10 percentage point increase in foreign presence implies moving about half of the way from the production of pot scourers to producing stainless sinks. An increase of about 17 percentage points in FDI in the relevant sectors would be necessary in order to move from the production of stainless sinks to the production of the washing machine flanges.


Our findings matter for policy. Dani Rodrik argues that enhancing an economy’s productive capabilities over an increasing range of manufactured goods can be considered an integral part of economic development.[5] As foreign affiliates facilitate the upgrading of the host country’s productive capabilities, our results, then, imply that FDI inflows can act as an important stimulus for economic growth. Thus, there is room for investment promotion activities, a policy that is quite effective in developing countries.[6] In contrast to many other industrial policies, investment promotion is relatively inexpensive and causes few distortions. Therefore, there is little downside when the government gets it wrong.


Harding, T. and Javorcik, B.S. (2011). ‘Roll out the red carpet and they will come: investment promotion and FDI inflows’, Economic Journal, vol. 121(557), pp. 1445–1476.

Harding, T. and Javorcik, B.S. (2012). ‘Foreign direct investment and export upgrading’, The Review of Economics and Statistics, vol. 94(4), pp. 964–980.

Hidalgo, C.A. and Hausmann, R.(2009). ‘The building blocks of economic complexity’, Proc. Natl. Acad. Sci., vol. 106, pp. 10570–10575.

Javorcik, B.S., Lo Turco, A., Maggioni, D. ‘New and Improved: Does FDI Boost Production Complexity in Host Countries?‘ Economic Journal, forthcoming.

Rodrik, D. (2006). ‘Industrial development: stylized facts and policies’, Kennedy School of Government.


[1] See Harding and Javorcik (2012).

[2] Javorcik, Lo Turco and Maggioni (forthcoming).

[3] See Hidalgo (2009).

[4] See Hidalgo and Hausmann (2009)

[5] See Rodrik (2006)

[6] Harding and Javorcik (2011)

Welcome new members – January 2018

We would like to welcome the following new members of the InsTED network:

Dr Hendrik W.Kruse (University of Göttingen) His main research interests are in International Trade and Capital Flows, Inequality, Development and MENA (Middle East and North Africa)

Dr Karan Nagpal (University of Oxford) His main research interests are in Development Economics, Urban Economics and Political Economy

Prof Jee-Hyeong Park (Seoul National University) His main research interest is in International Trade

Dr Meredith Startz (Princeton University) Her main research interests are in Development Economics and International Trade

Dr Jonathan L.Weigel (Harvard University) His primary research interests are in taxation, corruption, and political engagement in developing countries

Prof Woan Foong Wong (University of Oregon) Her main research interests are International Economics and International Trade



2018 InsTED Workshop at Syracuse University

5th InsTED Workshop on
“Advances in Institutions, Trade and Economic Development”

The workshop will take place at Syracuse University, NY, USA, May 15th-16th 2018. Sponsorship by the Department of Economics, the Maxwell School Dean’s Office, the Moynihan Institute of Global Affairs, and the Program for the Advancement of Research on Conflict and Collaboration, all at Syracuse University, is gratefully acknowledged.

Keynote speakers:

Pol Antràs (Harvard University)

Nina Pavcnik (Dartmouth College)



Directions to 220 Eggers (Registration & All Sessions)

Registration: Please click here to register




Organizers: Kristy Buzard (Syracuse), Devashish Mitra (Syracuse), Ben Zissimos (Exeter) and Isleide Zissimos (Exeter)

CEP | IMF | WTO: Trade Policy, Call for Papers: Inclusion and the Rise of the Service Economy

Conference dates

25 Apr 2018 – 26 Apr 2018


WTO Secretariat | Centre William Rappard | Geneva, Switzerland


Over the past two decades, services have been the fastest growing segment of global trade, employment and output. The rise of the service economy has fundamentally altered the economic landscape across the world, and is likely to play a key part in shaping the global economy in the future.

As a result, services have rapidly moved up trade policy agendas worldwide. In fact, since 2006 77% of all signed preferential trade agreements included substantive services provisions, up from only 16% in the 1990s.

The unprecedented prominence of services in global trade offers challenges and opportunities that are yet to be sufficiently understood. The analytical void underlying this phenomenon risks resulting in important misalignments between the implementation of trade policy frameworks and the global agenda for inclusive growth.

Against this backdrop, the Council on Economic Policies, the International Monetary Fund and the World Trade Organization are organizing a workshop on 25-26 April, 2018 in Geneva, Switzerland, on policy relevant aspects of the links between trade in services and inclusive growth. Papers presented in the workshop will be considered for an expedited review process for a Review of International Economics special issue to be published in 2019.

TOPICS: We particularly encourage the submission of unpublished empirical work that uses new datasets or exploits policy experiments in a novel and informative way. Topics of interest include, but are not limited to:
– What is the effect of services trade on inclusive growth and structural transformation? Is trade in services a promising development strategy for developing economies?
– How does services trade affect employment, income and gender inequality, quality of and access to service delivery, and innovation?
– What are key determinants of and barriers to services trade? To what extent have trade agreements reduced them?
– What policies are needed to increase services trade opportunities for inclusive growth?

PROGRAM: The workshop will start with a welcome dinner on April 24. April 25 will be devoted to paper presentations as well as a policy debate with trade negotiators and other practitioners in the evening. Presentations will continue in the morning of April 26, followed by an exploration of new directions for research in the afternoon. The workshop will take place at the WTO Secretariat.

SUBMISSIONS: Papers should be submitted by February 15, 2018 to Successful submissions will be notified by beginning of March 2018.

Peter Egger, ETH Zurich
Ricardo Hausmann, Harvard University
Bernard Hoekman, European University Institute
Bob Koopman, World Trade Organization
Aaditya Mattoo, World Bank
Margaret McMillan, Tufts University
Chris Papageorgiou, International Monetary Fund
Johannes Schwarzer, Council on Economic Policies

Additional Information

The 17th Annual GEP Postgraduate Conference 2018 University of Nottingham, United Kingdom

The 17th GEP Postgraduate Conference will take place on 19 – 20 April 2018 at the University of Nottingham. The Conference provides a forum for the dissemination of student research relating to issues of Globalisation and Economic Policy from both theoretical and empirical perspectives. These areas include Foreign Direct Investment, Trade, Productivity, Economics of the MNEs, Migration and Labour Market Adjustment. The objective of the Conference is to bring together a number of PhD students and postdoctoral researchers to discuss their own research ideas with established researchers in a relaxed atmosphere. The conference is open to graduate students and post-docs. Speakers will be selected on the basis of submitted papers or an extended abstract. (Preference will, however, be given to papers.)

Applicants must submit their CV, a letter of support from their PhD supervisor (sent separately by email; this is not required for post-docs) and the paper to be presented. If a full paper is not yet available, please include a detailed abstract, providing clearly the motivation for the work, the relationship to the literature, the method used and the expected results. Every paper accepted will be assigned a discussant who will present and comment on the paper. Therefore, those who are invited to present a paper are expected to deliver a complete paper before the Conference.

Applications must be sent by e-mail to:
Dr Alejandro Riaño
Deadline for submission: 4th February 2018
Keynote speaker: Dr. Ferdinand Rauch (University of Oxford)

There is a £180 registration fee to contribute towards costs which includes up
to two nights’ accommodation (18 and 19 April).

Best Paper Prize
The organising committee will award a prize of ₤100 to the best paper presented at the Conference.

Further information
Further information on the Conference can be found at: