11/2005 Priit Vahter. Which firms benefit more from inward foreign direct investment?

Working Papers of Eesti Pank. No 11, 2005

In the study of the effects of foreign direct investment (FDI) on host countries, an interesting question that is highly relevant to government policy concerning FDI is whether the benefits of inward FDI both as "own-firm" effects of FDI in foreign subsidiaries and positive spillover effects for other firms are captured to a larger extent by certain types of enterprises in the host economy? Are there particular characteristics (often called absorptive capacity, e.g. by Cohen, Levinthal 1989) that determine whether a firm can benefit from positive spillovers? In this paper I will try to assess these issues based on enterprise level panel data from Estonia. I find that for the total factor productivity effects of FDI at the subsidiary level, characteristics such as export or domestic market orientation of the affiliate may be important. I do not find that selected indicators such as exporting, R&D activity or intensity of technology in the sector are important for benefiting from horizontal spillovers of FDI in Estonia.
JEL Code: F10, F21, F23
Keywords: foreign direct investment, productivity, spillovers, absorptive capacity

* Helpful comments and suggestions by my colleagues at the Research Department and the Central Bank Policy Department of Eesti Pank, Holger Görg from University of Nottingham and Urmas Varblane from University of Tartu are gratefully acknowledged. Additionally, this paper has benefited from comments by participants of the following conferences: GEP 4th Postgraduate Conference at University of Nottingham (April, 2005); The Capitalization of Knowledge in Turin (May, 2005) and EACES workshop: National Innovation Systems and FDI in Central Eastern Europe: The Role of Technology Convergence (July, 2005) in Halle/Freiberg.

Author's e-mail address: Priit.Vahter [at] epbe.ee

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

Contents

1. Introduction
2. Literature Review
3. Methodology and Data
4. Empirical Results
5. Conclusions
References

Which Firms Benefit More From Inward Foreign Direct Investment? Working Papers of Eesti Pank No 11, 2005 (PDF*)

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