1. Beata Javorcik University of Oxford and CEPR
Can Eastern European experience teach us anything about development impacts of FDI in other parts of the world?
Beata Javorcik
University of Oxford and CEPR

2. Yes! Why?
Why the composition of FDI inflows differs from region to region, major multinationals are present on all continents
Differential impacts of FDI can be attributed to host country conditions rather than region-specific factors

3. Why should we expect technology transfer through FDI?
Theoretical literature
OLI paradigm (Dunning 1988)
Models with heterogenous firms (Helpman, Melitz and Yeaple, AER 2004)
MNCs are more likely to offer training to their employees
MNCs are responsible for most of the world’s R&D
700 multinational corporations accounted for 46% of the world’s total R&D expenditure and 69% of the world’s business R&D in 2002 (UNCTAD, 2005)
R&D budgets of large multinationals may exceed R&D spending of some countries

4. R&D budgets of some MNCs exceed R&D spending of transition countries (2003)
CIS figure includes: Russia, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Ukraine, Uzbekistan.
New EU member states figure includes: Czech Rep, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Rep, Slovenia.

5. Productivity spillovers from FDI
Horizontal - from presence of multinationals (MNCs) in the same sector
demonstration effect, movement of labor
MNCs have an incentive to prevent them

6. Different channels are at work and relative magnitudes differ by country
World Bank survey: Has the presence of foreign firms operating in your industry
had any impact on your firm?

7. Productivity spillovers from FDI
Horizontal - from presence of multinationals (MNCs) in the same sector
demonstration effect, movement of labor
MNCs have an incentive to prevent them
Backward linkages - contacts between local
suppliers and MNC customers
direct assistance to suppliers, higher requirements
MNCs have an incentive to promote them
=> more likely to observe spillovers through backward linkages rather than the horizontal channel

8. Broad patterns are similar across regions
No evidence of horizontal spillovers
Evidence consistent with spillovers through backward linkages
Lithuania (Javorcik, AER 2004)
Indonesia (Blalock and Gertler, JIE 2007)

9. Beneficial effects of services FDI
A one-standard-deviation increase in FDI in services => a 3.8% increase in the average productivity of Czech firms in manufacturing
Services liberalization from the level of Romania to the level of the Czech Republic => a 4.8% increase in the average productivity of Czech firms
Arnold et al (2007)
A one-standard-deviation increase in services liberalization => a productivity increase of 6% for Indian firms
Arnold et al (2008)

10. Bottom line
Diverse experiences of countries are a reflection of their policies and characteristics, not region-specific factors
Hence, Eastern European experience contain valuable lessons for Asian countries, and vice versa

11. Thank you

12. Total Factor Productivity
Foreign ownership improves performance (Indonesia: Arnold and Javorcik 2008)
Total Factor Productivity
Pre-acquisition
Year
Acquisition
year
One year later
Two years later
Treatment group
0.864
1.079
1.142
1.215
Control group
0.867
0.976
1.022
1.083
ATT
0.106***
0.122***
0.135***
(0.034)
(0.045)
(0.051)
No. of matched pairs
297

13. Foreign ownership improves performance (Indonesia: Arnold and Javorcik 2008)
Labor productivity
Pre-acquisition
Year
Acquisition
year
One year later
Two years later
Treatment group
4.28
4.50
4.60
4.62
Control group
4.20
4.14
4.06
4.05
ATT
0.280***
0.459***
0.489***
(0.072)
(0.074)
(0.088)
No. of matched pairs
392

14. Acquisitions induce rapid changes

15. Acquisitions lead to higher investment

16. Acquisitions facilitate integration into global markets

17. What foreign owners do not change

18. How do we reconcile an increase in TFP with no change in capital- and skill-intensity?
TFP increase achieved through organizational and managerial changes
Attracting more experienced and motivated workers
Pay scales linked to performance
Foreign affiliates in Indonesia pay higher wages to workers with a given educational level than domestic producers (Lipsey and Sjöholm 2004)
Training of workers
Better inputs

19. Thank you

20. Mixed results from firm-level panel studies of FDI spillovers
Aitken and Harrison (AER 1999) - Venezuelan plant-level data
Increase in FDI presence negatively affects TFP of local plants in the same sector
Haskel, Pereira and Slaughter (REStat 2007) - UK plant-level data
Increase in FDI presence positively affects TFP of local plants in the same sector
Javorcik (AER 2004) - Lithuanian firm-level data
Positive spillovers to supplying sectors, no evidence of intra-industry effects

22. Country conditions may matter
Aitken and Harrison (1999) – Venezuela
Heavy restrictions on foreign investors, mandatory JVs, import substitution => low incentives for technology transfer to foreign affiliates (Moran 2007)
Increase in foreign equity => increase in TFP only in firms with under 50 employees => little potential for producing knowledge spillovers
Haskel, Pereira and Slaughter (2007) - UK
Highly developed country => limited potential for ‘market stealing’
Highly developed country => limited room to learn
Lesser performers benefit more from spillovers
Javorcik (2004) - Lithuania
Transition from central planning to free market
Limited competition and exposure to foreign goods => ‘market stealing’ effect likely
Limited exposure to foreign buyers in the past => potential for spillovers from foreign customers