The Role of FDI in Eastern Europe and New Independent States: New Channels for the Spillover Effect

Centro Studi Luca d'Agliano Development Studies Working Paper No. 217

36 Pages Posted: 7 Mar 2007

See all articles by Irina Tytell

Irina Tytell

Fidelity Investments; International Monetary Fund (IMF)

Ksenia Yudaeva

CEFIR, Centre for Economic and Financial Research

Date Written: July 2006

Abstract

Policymakers around the world introduce special policies aimed at attracting foreign direct investments (FDI). They motivate their decision by the spillover effect, which FDI have on domestic companies. Empirical literature so far has failed to find any robust evidence of this effect. In this paper, we make an attempt to explain this finding. Using data from Poland, Romania, Russia, and Ukraine, we demonstrate that not all FDI have positive spillover effects on domestic firms. Spillovers are positive only in the case of export-oriented FDI and, more generally, are driven by the more productive foreign companies. Moreover, effects of FDI on domestic firms are not limited to knowledge spillovers: exposure to foreign technologies alters the form of their production functions. Specifically, foreign entry is associated with higher capital intensity and lower labor intensity of domestic firms in relatively more developed countries, such as Poland, while the opposite is the case in the less developed countries, such as Russia. These results are subject to threshold effects: benefits are more likely to materialize once a relatively large stock of foreign capital is accumulated. Absorptive capacity of domestic firms plays a crucial role in reaping the benefits of FDI. Both, knowledge spillovers and production function changes, occur predominantly in the more educated and the less corrupt regions.

Keywords: Foreing direct investments, Eastern Europe, Spilover effect

JEL Classification: F22

Suggested Citation

Tytell, Irina and Yudaeva, Ksenia, The Role of FDI in Eastern Europe and New Independent States: New Channels for the Spillover Effect (July 2006). Available at SSRN: https://ssrn.com/abstract=967340 or http://dx.doi.org/10.2139/ssrn.967340

Irina Tytell (Contact Author)

Fidelity Investments ( email )

245 Summer Street
Boston, MA 02210
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ksenia Yudaeva

CEFIR, Centre for Economic and Financial Research ( email )

47 Nakhimovsky Prospect, Office #720
117418 Moscow
Russia

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