Working Paper: CEPR ID: DP6546
Authors: Yuriy Gorodnichenko; Jan Svejnar; Katherine Terrell
Abstract: We use firm-level data and national input-output tables from 17 countries over the 2002-2005 period to test new and existing hypotheses about the impact of foreign direct investment (FDI) on the efficiency of domestic firms in the host country (i.e., spillovers). Providing evidence from a larger sample of countries and greater variety of firms than existing studies, with separate estimates by firm size, age, and sector, we show: a) backward spillovers (stemming from supplying a foreign firm in the host country or exporting to a foreign firm) are consistently positive; b) horizontal spillovers are mostly insignificant but positive for older firms and firms in the service sector; d) forward spillovers (from purchasing from foreign firms or importing) are also positive only for old and service sector firms. We find no support for the hypothesis that spillovers are greater for FDI with more advanced technology. While efficiency of domestic firms? is affected by the business environment, the strength of FDI spillovers is not, either when measured by the degree of corruption, bureaucratic red tape or by differences across regions that vary in terms of development. Testing whether spillovers vary with the firm?s ?absorptive capacity? we find: i) distance from the efficiency frontier tends to dampen horizontal spillovers in manufacturing and backward spillovers among old firms; ii) whereas firms with a larger share of university educated workforce are more productive, they do not enjoy greater FDI spillovers than firms with less educated workers. FDI spillovers hence vary by sectors and types of firms.
Keywords: efficiency; FDI spillovers; transition economies
JEL Codes: F23; M16; O16; P23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sales to foreign firms (F23) | Efficiency of domestic firms (D22) |
| Backward spillovers (F12) | Efficiency of domestic firms (D22) |
| Horizontal spillovers (F69) | Efficiency of domestic firms (D22) |
| Forward spillovers (F69) | Efficiency of domestic firms (D22) |
| Absorptive capacity (F35) | Horizontal spillovers (F69) |
| Absorptive capacity (F35) | Backward spillovers (F12) |
| Business environment (L53) | Strength of spillovers (F69) |