Impact of Firm Heterogeneity on Direct and Spillover Effects of FDI: Micro Evidence from Ten Transition Countries

Katholieke Universiteit Leuven, LICOS Discussion Paper No. 218/2008

44 Pages Posted: 18 Mar 2009

See all articles by Jože P. Damijan

Jože P. Damijan

University of Ljubljana, Slovenia - Department of International Economics

Matija Rojec

University of Ljubljana - Faculty of Social Sciences

Boris Majcen

Institute for Economic Research - Slovenia

Mark S. Knell

NIFU Nordic Institute for Studies in Innovation, Research and Education

Date Written: 2008

Abstract

This paper presents a comparative study of the importance of direct technology transfer and spillovers through FDI on a set of ten transition countries, using a common methodology and appropriate methods to account for selection and simultaneity correction. This paper considers by far the largest firm level dataset (more than 90,000 firms) used by any study on the spillover effects of FDI. The main novelty of the paper is the explicit control for various sources of firm heterogeneity when accounting for different effects of FDI on firm performance. Controlling for these variables leads to some interesting results which contrast with the previous empirical work in the field. We find that horizontal spillovers have become increasingly important over the last decade, and they may even become more important than vertical spillovers. Furthermore, this work shows that the heterogeneity of firms in terms of absorptive capacity, size, productivity and technology levels affect the results. These findings suggest that both direct effects from foreign ownership as well as the spillovers from foreign firms substantially depend on the absorptive capacity and productivity level of individual firms. Only more productive firms and firms with higher absorptive capacities are able to both compete with foreign affiliates in the same sector and benefit from the increased upstream demand for intermediates generated by foreign affiliates. In addition, these results show that foreign presence may also affect smaller firms to a larger extent than larger firms, but this impact may be in either direction.

Keywords: Foreign direct investment, technology transfer, spillovers, transition economies, firm heterogeneity

JEL Classification: D24, F14

Suggested Citation

Damijan, Joze P. and Rojec, Matija and Majcen, Boris and Knell, Mark S., Impact of Firm Heterogeneity on Direct and Spillover Effects of FDI: Micro Evidence from Ten Transition Countries (2008). Katholieke Universiteit Leuven, LICOS Discussion Paper No. 218/2008. Available at SSRN: https://ssrn.com/abstract=1361535 or http://dx.doi.org/10.2139/ssrn.1361535

Joze P. Damijan (Contact Author)

University of Ljubljana, Slovenia - Department of International Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia
+386 61 189 24 00 (Phone)
+386 61 189 26 98 (Fax)

Matija Rojec

University of Ljubljana - Faculty of Social Sciences ( email )

Kardeljeva ploscad 5
Ljubljana, 1000
Slovenia

Boris Majcen

Institute for Economic Research - Slovenia ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Mark S. Knell

NIFU Nordic Institute for Studies in Innovation, Research and Education ( email )

Wergelandsveien 7
Oslo, NO-0167
Norway
+4722595161 (Phone)

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