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The Role of FDI in Eastern Europe and New Independent States: New Channels for the Spillover Effect

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  • Irina Tytell

    (International Monetary Fund)

  • Ksenia Yudaeva

    (Center for Economic and Financial Research (CEFIR) and Carnegie Moscow Center)

Abstract

Policymakers around the world introduce special policies aimed at attracting foreign direct investments (FDI). They motivate their decision by the spillover effect, which FDI have on domestic companies. Empirical literature so far has failed to find any robust evidence of this effect. In this paper, we make an attempt to explain this finding. Using data from Poland, Romania, Russia, and Ukraine, we demonstrate that not all FDI have positive spillover effects on domestic firms. Spillovers are positive only in the case of export-oriented FDI and, more generally, are driven by the more productive foreign companies. Moreover, effects of FDI on domestic firms are not limited to knowledge spillovers: exposure to foreign technologies alters the form of their production functions. Specifically, foreign entry is associated with higher capital intensity and lower labor intensity of domestic firms in relatively more developed countries, such as Poland, while the opposite is the case in the less developed countries, such as Russia. These results are subject to threshold effects: benefits are more likely to materialize once a relatively large stock of foreign capital is accumulated. Absorptive capacity of domestic firms plays a crucial role in reaping the benefits of FDI. Both, knowledge spillovers and production function changes, occur predominantly in the more educated and the less corrupt regions.

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Bibliographic Info

Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 217.

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Date of creation: 01 Jun 2006
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Handle: RePEc:csl:devewp:217

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Cited by:
  1. Kolesnikova, Irina, 2010. "State Aid for Industrial Enterprises in Belarus: Remedy or Poison?," MPRA Paper 22403, University Library of Munich, Germany.
  2. Bessonova, Eugenia, 2010. "Efficiency of Manufacturing in Russia: Effect of Domestic Competition and FDI," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 17(1), pages 106-127.
  3. Jan Hanousek & Evžen Kočenda & Mathilde Maurel, 2010. "Direct and indirect effects of FDI in emerging European markets : a survey and meta-analysis," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00469544, HAL.
  4. Resmini, Laura & Nicolini, Marcella, 2007. "Productivity Spillovers from Foreign Investment: The Role of Neglected Conditionalities," Papers, Economic and Social Research Institute (ESRI) DYNREG11, Economic and Social Research Institute (ESRI).
  5. Joze P. Damijan & Matija Rojec & Boris Majcen & Mark Knell, 2008. "Impact of Firm Heterogeneity on Direct and Spillover Effects of FDI: Micro Evidence from Ten Transition Countries," LICOS Discussion Papers, LICOS - Centre for Institutions and Economic Performance, KU Leuven 21808, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  6. Farole, Thomas & Winkler, Deborah, 2012. "Foreign firm characteristics, absorptive capacity and the institutional framework : the role of mediating factors for FDI spillovers in low- and middle-income countries," Policy Research Working Paper Series 6265, The World Bank.
  7. Iwasaki, Ichiro & Suganuma, Keiko, 2014. "Foregign Direct Investment and Regional Economic Growth in Russia: An Econometric Assessment," RRC Working Paper Series, Russian Research Center, Institute of Economic Research, Hitotsubashi University 44, Russian Research Center, Institute of Economic Research, Hitotsubashi University.

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