Can Eastern European experience teach us anything about development impacts of FDI in other parts of the world?

Beata JavorcikUniversity of Oxford and CEPR

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

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

R&D budgets of some MNCs exceed R&D spending of transition countries (2003)

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CIS new EU memberstates

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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.

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

Different channels are at work and relative magnitudes differ by country

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World Bank survey: Has the presence of foreign firms operating in your industryhad any impact on your firm?

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

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)

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)

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

Thank you

Foreign ownership improves performance (Indonesia: Arnold and Javorcik 2008)

Total Factor Productivity

Pre-acquisitionYear

Acquisitionyear

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 297 297 297

Foreign ownership improves performance (Indonesia: Arnold and Javorcik 2008)

Labor productivity

Pre-acquisitionYear

Acquisitionyear

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 392 392 392

Acquisitions induce rapid changes

(d) Employment

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(e) Average wage

7.607.808.008.208.408.608.809.00

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(c) Output

10.0010.2010.4010.6010.8011.0011.2011.40

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Acquisitions lead to higher investment

(f) Investment

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(g) Investment in machinery

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Acquisitions facilitate integration into global markets

(h) Export share

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(i) Import input share

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What foreign owners do not change

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(l) Capacity utilization

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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

Thank you

Mixed results from firm-level panel studies of FDI spillovers

Aitken and Harrison (AER 1999) - Venezuelan plant-level data 1976-1989

Increase in FDI presence negatively affects TFP of local plants in the same sector

Haskel, Pereira and Slaughter (REStat 2007) - UK plant-level data 1973-1992

Increase in FDI presence positively affects TFP of local plants in the same sector

Javorcik (AER 2004) - Lithuanian firm-level data 1996-2000 Positive spillovers to supplying sectors, no evidence

of intra-industry effects

Country conditions may matter Aitken and Harrison (1999) – Venezuela 1976-1989

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 1973-1992 Highly developed country => limited potential for ‘market stealing’ Highly developed country => limited room to learn Lesser performers benefit more from spillovers

Javorcik (2004) - Lithuania 1996-2000 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