EFFECTS OF FDI SPILLOVERS ON THE PRODUCTIVITY OF DOMESTIC FIRMS IN SELECTED TRANSITION COUNTRIES

The transition to a market based economy in Central and East European countries (CEECs) was characterised by deep structural and institutional reforms. These reforms, particularly the liberalisation of trade and capital flows, played a prominent role and enabled the entry of these countries in the “FDI market”. It was expected that the entry of MNCs into these countries would foster firm restructuring, change the export structure and above all generate knowledge spillovers and create linkages with indigenous firms. Therefore, CEECs started to offer various incentives to attract FDI, hoping that some of the technology brought by MNCs will spill over to local firms. This would enable them to increase their productivity and achieve higher rates of growth that would result in convergence with more advanced countries.
The aim of this thesis is to investigate productivity spillovers from FDI to local firms in five transition countries using firm level data for the period 2002-2010. Several elements differentiate this study from the previous analyses. We compare the effects of horizontal spillovers and vertical linkages from FDI across countries and two main sectors (manufacturing and services) and assess the heterogeneity of MNCs. To the best of our knowledge this is the first study taking into account MNCs’ origin and the extent of foreign ownership in a group of transition economies. Given the importance of FDI in services we further disentangle vertical linkages according to sectoral source and investigate the moderating role of firms’ absorptive capacity. Semi-parametric approach based on control function is applied to estimate firms’ total factor productivity (TFP) which is then used in the estimation of horizontal and vertical spillovers from FDI along with other firm and industry level determinants. FDI spillovers are estimated using the dynamic panel econometric technique.
Our findings indicate that local firms in the advanced stage of transition benefit from horizontal spillovers arising mostly in service sector and from partially owned foreign firms while the effects of MNCs’ origin are ambiguous. We also find that net effects of FDI spillovers are driven by vertical linkages. In particular, positive effect of backward linkages on firm productivity are found for fully owned and non-EU MNCs. However, for a limited set of countries, these positive effects of backward linkages are in certain
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cases further supported or offset by negative effects of partially owned foreign firms and EU MNCs. On the other hand, forward linkages when positive are limited to EU MNCs while non-EU MNCs and both partially and fully owned foreign firms exhibit mostly negative productivity effects with the exception of two countries. Furthermore, we find that MNCs in manufacturing and service sectors generate significant productivity spillovers to manufacturing firms which are further strengthened with higher levels of absorptive capacity. However, in most cases these spillovers occur through different vertical channels, namely through manufacturing backward and services forward spillovers thus shedding new light on the increasing importance of forward linkages and FDI in services. Human capital and investment in intangibles are found to be strong determinants of firm productivity together with increased competition, while firms’ age and size have U-shape and inverse U-shape effects, respectively.
This thesis shows that the effects of FDI spillovers differ among countries suggesting that sectoral and MNCs’ heterogeneity play an important role in driving the overall results. Therefore, based on these findings we have developed a set of policy recommendations for policy makers and investment promotion agencies with the aim to maximise the benefits of MNC’s entry for indigenous firms’ productivity and their inclusion into Global Value Chains.