FDI, Productivity and Wages. New Evidence from a Romanian Matched Sample

Governments in Central and Eastern Europe have created special incentives in order to attract FDI, based on the optimistic idea that foreign firms perform better than local ones. The recent literature sheds some doubt on the sources of productivity and wage premium, suggesting that most of the performance gap is actually due to selfselection. In the present paper we reevaluate the productivity and wage premium of foreign affiliates using a large dataset of Romanian firms, for the period 2000-2008. In order to correct for self- selection and endogeneity, we use a non-parametric econometric approach. Propensity score matching allows us to go beyond a correlation analysis and establish a causal effect of foreign ownership on performance gaps. We find that that around 40% of the productivity gap and 42% of the wage premium is due to self-selection. Once this bias removed, foreign affiliates still present 19% higher productivity and 22% higher wages compared to domestic firms. Results also confirm spillovers effects to domestic firms and show evidence of rent-sharing between foreign affiliates and their employees. We conclude that FDI do indeed have beneficial effects in the Romanian economy, though their magnitude is considerably overestimated.