The impact of foreign direct investment (FDI) on local companies and
industries and has been widely studied in FDI spillover research. However, empirical
research results have been mixed, and understanding of the mechanisms of FDI
spillover effects on micro level is limited. Hence, there have been calls for
research increasing theoretical insight on the phenomenon.

This paper contributes to the understanding
on how FDI spillovers take place on micro level, and spread to network level. A
framework incorporating knowledge from FDI spillover research and the ideas of
the industrial network approach is created. The paper argues that change in a
network is a prerequisite for spillovers and spillovers depend on the
characteristics of the foreign subsidiary’s business network.

The developed framework acknowledged
both intended and unintended consequences of foreign entry on local firms and networks.
Due to the interconnectedness of actors in a business network, intended changes
initiated by the foreign subsidiary in its dyadic relationships with local
firms may turn into unintended effects on broader business network. Hence, studying
FDI spillovers either on horizontal or vertical level may be inadequate, as
spillovers can be transferred as network change to distant network members in
the same or related industries.