Foreign Direct Investment and the Limits of Spillover in Oman’s Manufacturing Sector: A Structuralist Perspective

This dissertation examines whether foreign direct investment (FDI) generates productivity spillovers in Oman’s manufacturing sector and investigates why these effects have remained limited and uneven. The study combines census-frame administrative data covering manufacturing establishments from 2012 to 2019 with qualitative fieldwork comprising 147 interviews, supported by site visits and shop-floor observation. Dynamic GMM estimates indicate a negative relationship between foreign presence and domestic-firm productivity. A one-percentage-point increase in the foreign share of industry output is associated with an approximately 3 per cent decline in value-added productivity and a 1.3 per cent decline in gross-output productivity, while ownership-specific estimates reveal no consistently robust positive spillovers. Comparison of the aluminium and steel/iron value chains reveals a hierarchical segmentation of production and learning opportunities, shaped by the characteristics of each segment and the form of state involvement. In aluminium, the state’s operational embeddedness, bargaining leverage, and control over strategic resources enabled it to secure binding training and localisation commitments upstream and promote domestic processing in the midstream. This supported capability formation upstream and employment in the midstream, but generated limited technical depth and did not transform downstream conditions. Steel and iron developed primarily through investor-led entry, while state involvement remained facilitative or financially oriented, without comparable training or domestic-linkage obligations. Advanced capabilities consequently developed within upstream firms but remained organisationally enclaved, while the wider value chain remained fragmented and weakly integrated. Across both industries, downstream firms operate in low-margin, highly competitive markets that constrain investment in technology, training, and organisational capabilities. Low wages and difficult working conditions further limit Omani employment and labour mobility in these segments. The dissertation argues that limited spillovers cannot be explained solely by human-capital deficits, institutional weakness, or firm-level absorptive capacity. They also reflect ownership structures, labour-market segmentation, uneven organisational capabilities, and hierarchical value chains that determine where capabilities are created and whether they diffuse. State involvement can support capability formation, but its effectiveness varies across value-chain segments and depends on its operational embeddedness and bargaining leverage. Attracting FDI alone is therefore insufficient: industrial policy must address the organisation of production and the segment-specific conditions governing domestic learning and capability formation.