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The Impact of FDI on the Host Economy

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  • Pavla Nikolovova
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    Abstract

    The foreign direct investment (FDI) and its impact on performance of domestic firms has been studied in many empirical papers, which, however, present rather ambiguous results. I argue that this is due to some limitations of prevalently used methodology, which does not separate the FDI spillover effects from the changes in competitive environment faced by domestic firms. I propose a novel estimation strategy that allows me to disentangle FDI spillovers from the effects of competition changing in response to the entry of a foreign firm. I consider this issue on the industry level and I compare the effects of FDI to the impact of international trade on the domestic economy. My analysis covers the time period 2001 - 2007 and concerns both Western and Eastern European countries. My identification strategy leads me to confirm the presence of positive spillovers stemming from FDI.

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    Bibliographic Info

    Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp471.

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    Date of creation: Nov 2012
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    Handle: RePEc:cer:papers:wp471

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    Related research

    Keywords: FDI; MNE; horizontal spillovers; international trade;

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    1. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, Elsevier, vol. 43(2), pages 335-356, February.
    2. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
    3. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 38(3), pages 569-594, September.
    4. Smarzynska, Beata K., 2002. "Does foreign direct investment increase the productivity of domestic firms : in search of spillovers through backward linkages," Policy Research Working Paper Series 2923, The World Bank.
    5. Gorodnichenko, Yuriy & Svejnar, Jan & Terrell, Katherine, 2007. "When Does FDI Have Positive Spillovers? Evidence from 17 Emerging Market Economies," IZA Discussion Papers 3079, Institute for the Study of Labor (IZA).
    6. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3381, C.E.P.R. Discussion Papers.
    7. Hodaka Morita & Xuan Nguyen, 2012. "FDI and Technology Spillovers under Vertical Product Di erentiation," Discussion Papers, School of Economics, The University of New South Wales 2012-19, School of Economics, The University of New South Wales.
    8. Wolfgang Keller, 2001. "International Technology Diffusion," NBER Working Papers 8573, National Bureau of Economic Research, Inc.
    9. Nickell, S.J., 1993. "Competition and Crporate Performance," Economics Series Working Papers, University of Oxford, Department of Economics 99155, University of Oxford, Department of Economics.
    10. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, Econometric Society, vol. 50(3), pages 649-70, May.
    11. Richard Frensch & Vitalija Gaucaite-Wittich, 2006. "Product variety and technical change," Working Papers, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies) 265, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
    12. Klaus E Meyer, 2004. "Perspectives on multinational enterprises in emerging economies," Journal of International Business Studies, Palgrave Macmillan, vol. 35(4), pages 259-276, July.
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