Foreign investment and domestic productivity in EU11 countries

This study analyzes the heterogeneous effect of FDI spillovers on the productivity of local firms in Central and Eastern European economies. Two direct and indirect transmission channels of knowledge spillovers are empirically investigated. The study focuses on the role of high-growth firms that are assumed to have a higher absorptive capacity. The fixed-effects model including country and sector fixed effects is applied to investigate a cross-section of 4943 firms. Our empirical analysis shows that first, larger firms with external market linkages are more productive. Second, high-growth enterprises are powerful engines of job creation, however, they do not outperform other firms in terms of capacity in absorbing FDI spillovers and do not have higher productivity. It highlights the necessity of rethinking public policy priorities to support firm growth. Policies to maximize the gains from FDI spillovers are discussed.