Sourcing Patterns of FDI Activity and Their Impact on the Domestic Economy

In this paper, we describe sourcing patterns of FDI activity and test empirically whether their impact on the host economy is such as predicted by theoretical models. In the analysis, we focus on inter-industry interactions between a multinational enterprise (MNE) which enters the domestic market and other firms in the economy within the broader context of international trade flows. Our main purpose is to determine whether FDI inflow indeed boosts demand for intermediate goods, and whether the MNE uses domestic suppliers of intermediate goods or whether it purchases its supplies from abroad or from other MNEs entering the downstream sector. Our analysis covers the time period 2001–2007 and concerns both Western and Eastern European countries. Using an unbalanced panel of industries in these countries and the given time period, we come to the conclusion that even though FDI represents a positive shock to demand for intermediate goods, in countries of Eastern Europe this shock is better exploited by MNEs in the upstream sector and foreign importing firms than by domestic producers.