The Productivity Spillover Potential of Foreign-Owned Firms: Firm-Level Evidence for Hungary

Abstract:     
This paper analyses the potential for productivity spillovers from inward foreign direct investment using administrative panel data for firms for Hungary. The productivity spillovers potential (PSP) is expected to be a function of the importance of firm-specific assets (FSA) within multinationals and the extent to which they are transferred to foreign affiliates. We hypothesise that the presence of FSA is related to observable characteristics of the production process of foreign affiliates. We further explore the role of competition in explaining productivity spillovers within industries. We find that productivity spillovers depend on its potential, the degree of competition and absorptive capacity. Firms that relocate labour-intensive activities to Hungary to exploit differences in labour costs are not found to generate productivity spillovers, while spillovers increases in the capital and material intensity of foreign affiliates. Second, we find that foreign presence tends to affect the productivity of domestic firms negatively whenever they compete in the same market, be it the local or export market. Finally, larger exporting firms appear better able to absorb productivity spillovers in the industry.

Number of Pages in PDF File: 26

Keywords: FDI, productivity spillovers, firm specific assets, exporting, competition

JEL Classification: F23

working papers series