Working Paper: NBER ID: w12808
Authors: Robert E. Lipsey
Abstract: The impacts of inward FDI on host countries are frequently studied using balance-of-payments based measures of flows and stocks. These are unreliable for the purpose because, while theories of the effects of investment are based on FDI production and employment in the host country, these measures are often distorted approximations of the location of real activity. The mismeasurement is particularly important if trade openness, often associated with FDI, is treated as a control variable. The countries of Central and Eastern Europe, a very minor object of US direct investment, have, since 1990, become a major location for FDI from Europe, especially from Germany. The investments from both the US and Germany are, on average, very labor-intensive, and are heavily concentrated in Motor Vehicles. One result has been a shift in the export comparative advantage of these countries toward the machinery and transport equipment sector. Microdata studies in the CEE countries have found that foreign participation is associated with higher productivity in the affiliates themselves. Spillovers to indigenous firms are more spotty, clearer to upstream suppliers than to firms in the same industries as the affiliates.
Keywords: Foreign Direct Investment; Central and Eastern Europe; Economic Growth; Productivity; Governance
JEL Codes: F21; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign Direct Investment (FDI) (F21) | Higher Productivity in Local Affiliates (D29) |
| Foreign Direct Investment (FDI) (F21) | Economic Growth (O49) |
| Higher Governance and Market Openness (L17) | Foreign Direct Investment (FDI) (F21) |
| Foreign Direct Investment (FDI) (F21) | Spillovers to Indigenous Firms (F23) |
| Higher Productivity in Local Affiliates (D29) | Economic Growth (O49) |
| Improved Governance (G38) | Economic Growth (O49) |