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The Effects of Direct Foreign Investment on Domestic Firms: Evidence from Firm Level Panel Data in Emerging Economies

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  • Konings, Jozef

Abstract

This paper uses firm level panel data to investigate empirically the effects of direct foreign investment (DFI) on the productivity performance of domestic firms in three emerging economies of Central and Eastern Europe, Bulgaria, Romania and Poland. To this end a unique firm level panel data set is used with detailed information on foreign ownership at the firm level. Two main questions are addressed in the present paper: (1) Do foreign firms perform better than their domestic counterparts? (2) Do foreign firms generate spillovers to domestic firms? The estimation technique in this paper takes potential endogeneity of ownership, spillovers and other factors into account by estimating a fixed effects model using instrumental variables in the general methods of moment technique for panel data. Only in Poland, I find that foreign firms perform better than firms without foreign participation. Moreover, for all three countries studied here, I find no evidence of positive spillovers to domestic firms on average. In contrast, on average there are negative spillovers to domestic firms in Bulgaria and Romania, while there are no spillovers to domestic firms in Poland. This suggests a negative competition effect that dominates a positive technology effect.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2586.

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Date of creation: Oct 2000
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Handle: RePEc:cpr:ceprdp:2586

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Keywords: Emerging Countries; Foreign Investment; Panel Data; Spillovers;

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References

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  1. Blomström, Magnus & Sjöholm, Fredrik, 1998. "Technology Transfer and Spillovers: Does Local Participation with Multinationals Matter?," Working Paper Series in Economics and Finance 268, Stockholm School of Economics.
  2. Sanna-Randaccio, Francesca, 2002. "The Impact of Foreign Direct Investment on Home and Host Countries with Endogenous R&D," Review of International Economics, Wiley Blackwell, vol. 10(2), pages 278-98, May.
  3. Leahy, Dermot & Neary, J. Peter, 2007. "Absorptive capacity, R&D spillovers, and public policy," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 1089-1108, October.
  4. Kokko, Ari, 1994. "Technology, market characteristics, and spillovers," Journal of Development Economics, Elsevier, vol. 43(2), pages 279-293, April.
  5. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
  6. Aitken, Brian & Harrison, Ann & DEC, 1994. "Do domestic firms benefit from foreign direct investment? Evidence from panel data," Policy Research Working Paper Series 1248, The World Bank.
  7. Repkine, Alexandre & Walsh, Patrick Paul, 1999. "Evidence of European Trade and Investment U-Shaping Industrial Output in Bulgaria, Hungary, Poland, and Romania," Journal of Comparative Economics, Elsevier, vol. 27(4), pages 730-752, December.
  8. Teece, David J, 1977. "Technology Transfer by Multinational Firms: The Resource Cost of Transferring Technological Know-how," Economic Journal, Royal Economic Society, vol. 87(346), pages 242-61, June.
  9. Djankov, Simeon & Hoekman, Bernard, 1998. "Avenues of Technology Transfer: Foreign Investment and Productivity Change in the Czech Republic," CEPR Discussion Papers 1883, C.E.P.R. Discussion Papers.
  10. Faggio, Giulia & Konings, Jozef, 1999. "Gross Job Flows and Firm Growth in Transition Countries: Evidence Using Firm Level Data on Five Countries," CEPR Discussion Papers 2261, C.E.P.R. Discussion Papers.
  11. Steve J. Davis & John Haltiwanger, 1991. "Gross job creation, gross job destruction and employment reallocation," Working Paper Series, Macroeconomic Issues 91-5, Federal Reserve Bank of Chicago.
  12. Levinsohn, James, 1999. "Employment responses to international liberalization in Chile," Journal of International Economics, Elsevier, vol. 47(2), pages 321-344, April.
  13. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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Citations

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Cited by:
  1. Karoly Fazekas, 2003. "Effects of foreign direct investment on the performance of local labour markets - The case of Hungary," Budapest Working Papers on the Labour Market 0303, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  2. Marcella Nicolini & Laura Resmini, 2006. "The Impact of Mnes on Domestic Firms in CEECS: A Micro-Econometric Approach," ERSA conference papers ersa06p411, European Regional Science Association.
  3. Ari Kokko & Victoria Kravtsova, 2008. "Innovative capability in MNC subsidiaries: evidence from four European transition economies," Post-Communist Economies, Taylor & Francis Journals, vol. 20(1), pages 57-75.
  4. Klara Sabirianova Peter & Jan Svejnar & Katherine Terrell, 2004. "Distance to the Efficiency Frontier and FDI Spillovers," William Davidson Institute Working Papers Series 2004-721, William Davidson Institute at the University of Michigan.
  5. Ljungwall, Christer & Gustavsson Tingvall, Patrik, 2008. "Is China Different? A Meta Analysis Of The Effect Of Foreign Direct Investment On Domestic Firms," Working Paper Series 2008-2, China Economic Research Center, Stockholm School of Economics.
  6. Carlo Altomonte & Laura Resmini, 2001. "Multinational Corporations as Catalyst for Industrial Development: The Case of Poland," William Davidson Institute Working Papers Series 368, William Davidson Institute at the University of Michigan.
  7. 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).
  8. Carmen Raluca Stoian & Roger Vickerman, 2005. "The Interplay Between Foreign Direct Investment, Security and European Integration: The Case of the Central and Eastern European Countries," Studies in Economics 0509, Department of Economics, University of Kent.
  9. S. Dobbelaere, 2003. "Ownership, Firm Size and Rent Sharing in a Transition Country," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/170, Ghent University, Faculty of Economics and Business Administration.

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