Abstract

The main purpose of this article is to investigate the drivers of labor productivity in the firms at the intra-industry level with focus on the spillover effects of FDI. Using a fixed effects approach, we estimate an expanded Cobb-Douglas production function in its intensive form to isolate the effects of increased capital intensity on labor productivity as well as the spillovers, using annual Private Sector Investment Survey data collected on the Ugandan manufacturing firms over the period 2007- 2010. Over all, there are significant negative horizontal spillovers for the domestic firms in Uganda, with OECD-originating FDI appearing to be the main source of such effects. By location, these are most adverse in the western and eastern regions and better spillovers can be traced in the central region. Additional findings point to firm size, labor quality and profit as positive contributors to labor productivity, whereas technology gap exhibits a detrimental impact just as we document no significant effect of capital intensity. Larger domestic firms appear to benefit significantly from spillovers in industries where foreign firms have a larger presence. The aforementioned findings reflect the need for well-designed policies to improve the competitiveness of local firms particularly via an incentive-equal opportunity-policy that captures both domestic and foreign investors and to improve infrastructure and other investor-friendly environment in the East and Western parts of Uganda. Similarly, our results suggest that the promotion of joint ventures (foreign) is likely to generate unequivocal benefits to the manufacturing sector in Uganda not only in terms of less negative horizontal spillovers but also from the labor quality, firm size and profit spillovers perspective. Finally, the finding of learning difficulties of domestic firms from foreign firms calls for programs in line with skill acquisition through job training and the review of the curriculum to focus on labor quality.

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