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

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  • Jozef Konings

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. Three key questions are addressed in the present paper: (1) do foreign firms perform better than their domestic counterparts? (2) do foreign firms generate positive spillovers to domestic firms? (3) Do technological spillovers from foreign firms depend on the absorptive capacity of domestic firms? I find that firms with some foreign investment perform better than firms without foreign participation. I find no evidence of positive spillovers to domestic firms on average. In contrast, on average there are no spillovers to domestic firms in Bulgaria and Romania, while there are negative spillovers to domestic firms in Poland. In addition, for Bulgaria and Poland, I find evidence that the absorptive capacity of domestic firms might matter to benefit from foreign investors. The results are consistent with recent theories of R&D spillovers through DFI.

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Bibliographic Info

Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 8699.

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Length: 19 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:lic:licosd:8699

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Keywords: Foreign Investment; Spillovers; Absorptive Capacity; Emerging countries;

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References

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  1. Steve J. Davis & John Haltiwanger, 1991. "Gross Job Creation, Gross Job Destruction and Employment Reallocation," NBER Working Papers 3728, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. Kokko, Ari, 1994. "Technology, market characteristics, and spillovers," Journal of Development Economics, Elsevier, vol. 43(2), pages 279-293, April.
  5. 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.
  6. 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.
  7. Magnus Blomstrom & Fredrik Sjoholm, 1998. "Technology Transfer and Spillovers? Does Local Participation with Multinationals Matter?," NBER Working Papers 6816, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
  11. Levinsohn, James, 1999. "Employment responses to international liberalization in Chile," Journal of International Economics, Elsevier, vol. 47(2), pages 321-344, April.
  12. 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.
  13. 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.
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Cited by:
  1. Gorodnichenko, Yuriy & Svejnar, Jan & Terrell, Katherine, 2007. "When Does FDI Have Positive Spillovers? Evidence from 17 Emerging Market Economies," CEPR Discussion Papers 6546, C.E.P.R. Discussion Papers.
  2. Kokko, Ari & Kravtsova, Victoria, 2006. "Innovative Capability In Mnc Subsidiaries: Evidence From Four European Transition Economies," EIJS Working Paper Series 224, The European Institute of Japanese Studies.
  3. 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.
  4. Sabirianova, Klara & Svejnar, Jan & Terrell, Katherine, 2004. "Distance to the Efficiency Frontier and FDI Spillovers," CEPR Discussion Papers 4723, C.E.P.R. Discussion Papers.
  5. Carlo Altomonte & Laura Resmini, 2001. "Multinational Corporations as Catalyst for Industrial Development. The Case of Poland," LICOS Discussion Papers 9701, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  6. Christer Ljungwall & Patrik Gustavsson Tingvall, 2010. "Is China different? A meta-analysis of the effects of foreign direct investment on domestic firms," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 8(4), pages 353-371.
  7. 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.
  8. Resmini, Laura & Nicolini, Marcella, 2007. "Productivity Spillovers from Foreign Investment: The Role of Neglected Conditionalities," Papers DYNREG11, Economic and Social Research Institute (ESRI).
  9. 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.

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