5/2010 Jaan Masso, Tõnu Roolaht and Urmas Varblane. Foreign direct investment and innovation in Central and Eastern Europe: Evidence from Estonia

Working Papers of Eesti Pank. No. 5/2010

A growing literature is trying to analyse the productivity gap between domestic and foreign firms with differences in innovation indicators. In our paper we analyse the relationship between inward and outward FDI at either company or industry level and the innovation behaviour of companies in Estonia. We use company-level data from three waves of the Community Innovation Surveys, which are combined with financial data from the Estonian Business Register and FDI data from the balance of payments statistics. For the analysis we apply a structural model involving equations on innovation expenditure, innovation outcome and productivity, and also innovation accounting and propensity score matching approaches. Our results show that the higher innovation output of foreign owned companies vanishes after various company characteristics are controlled for, but there were significant differences in innovation inputs such as the higher use of knowledge sourcing and the lower importance of various impeding factors. Outward investment has a positive influence on innovativeness among both domestic and foreign owned companies.
JEL Code: F10, F23, O30
Key words: innovation, internationalisation, foreign direct investments, catching-up countries

* The article was written during the period that Jaan Masso was a visiting researcher at Eesti Pank (Bank of Estonia). The authors also acknowledge the financial support given by the Ministry of Education and Research of the Republic of Estonia target financed project No. SF0180037s08 and Estonian Science Foundation grants No. 6853, 8311 and 7405. We are also grateful to Eurostat for providing the 4th Community Innovation Survey microdata to the University of Tartu; however Eurostat has no responsibility for the results or conclusions of the paper. The authors are solely responsible for all errors and omissions.

Authors' e-mail addresses: jaan.masso [at] mtk.ut.ee (corresponding author), Tonu.Roolaht [at] mtk.ut.ee, varblane [at] mtk.ut.ee

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction
2. Econometric method
3. Data description and preliminary analysis
4. Results of the econometric analysis
4.1. Innovation expenditure equation
4.2. Innovation output equation
4.3. Productivity equation
5. Matching analysis of FDI companies
6. Conclusions
References
Appendix 1. Overview of selected studies on the impact of foreign ownership on innovation
Appendix 2. Definitions and summary statistics of variables used in descriptive tables and regression analysis
Appendix 3. Econometric model

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