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

Author

Listed:
  • 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.

Suggested Citation

  • Irina Tytell & Ksenia Yudaeva, 2006. "The Role of FDI in Eastern Europe and New Independent States: New Channels for the Spillover Effect," Development Working Papers 217, Centro Studi Luca d'Agliano, University of Milano.
  • Handle: RePEc:csl:devewp:217
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    File URL: https://www.dagliano.unimi.it/media/WP2006_217.pdf
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    Cited by:

    1. Marcella Nicolini & Laura Resmini, 2006. "The Impact of Mnes on Domestic Firms in CEECS: A Micro-Econometric Approach," ERSA conference papers ersa06p411, European Regional Science Association.
    2. Hanousek, Jan & Kocenda, Evzen & Maurel, Mathilde, 2011. "Direct and indirect effects of FDI in emerging European markets: A survey and meta-analysis," Economic Systems, Elsevier, vol. 35(3), pages 301-322, September.
    3. Kolesnikova, Irina, 2010. "State Aid for Industrial Enterprises in Belarus: Remedy or Poison?," MPRA Paper 22403, University Library of Munich, Germany.
    4. Damijan, Jože & Kostevc, Črt & Marek, Philipp & Rojec, Matija, 2015. "Do Manufacturing Firms Benefit from Services FDI? – Evidence from Six New EU Member States," IWH Discussion Papers 5/2015, Halle Institute for Economic Research (IWH).
    5. Jože Damijan & Črt Kostevc & Matija Rojec, "undated". "FDI, structural change and productivity growth: global supply chains at work in Central and Eastern European countries," IRMO Occasional Papers 3, Institute for Development and International Relations, Zagreb.
    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. Ichiro Iwasaki & Keiko Suganuma, 2015. "Foreign direct investment and regional economic development in Russia: an econometric assessment," Economic Change and Restructuring, Springer, vol. 48(3), pages 209-255, November.
    8. Damijan, Jože P. & Rojec, Matija & Majcen, Boris & Knell, Mark, 2013. "Impact of firm heterogeneity on direct and spillover effects of FDI: Micro-evidence from ten transition countries," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 895-922.
    9. repec:lic:licosd:21808 is not listed on IDEAS
    10. Bessonova, Eugenia, 2010. "Efficiency of Manufacturing in Russia: Effect of Domestic Competition and FDI," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 17(1), pages 106-127.
    11. Ivan Savin & Peter Winker, 2012. "Heuristic Optimization Methods for Dynamic Panel Data Model Selection: Application on the Russian Innovative Performance," Computational Economics, Springer;Society for Computational Economics, vol. 39(4), pages 337-363, April.
    12. Matija Rojec & Mark Knell, 2018. "Why Is There A Lack Of Evidence On Knowledge Spillovers From Foreign Direct Investment?," Journal of Economic Surveys, Wiley Blackwell, vol. 32(3), pages 579-612, July.
    13. repec:lic:licosd:33213 is not listed on IDEAS
    14. Farole, Thomas & Hollweg, Claire & Winkler, Deborah, 2018. "Trade in Global Value Chain: An Assessment of Labor Market Implication," Jobs Group Papers, Notes, and Guides 30318036, The World Bank.
    15. Özcan Karahan & Olcay Çolak, 2021. "Foreign Direct Investment and Productivity Growth in Eastern European Countries," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Democritus University of Thrace (DUTH), Kavala Campus, Greece, vol. 14(3), pages 26-34, December.

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