Transcript Document

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
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 regionspecific 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)
8000
7000
millions of US dollars
6000
5000
4000
3000
2000
1000
0
CIS
new EU member
states
Ford Motor
Pfizer
DaimlerChrysler
Siemens
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
60
% of respondents
50
40
29
30
Czech Rep.
Latvia
24
20
15
Hired former MNC
employees
Information about
marketing
techniques
Information about
new technologies
Worsened access
to credit
Loss of
employees
Loss of market
share
0
Increased
competition
10
World Bank survey: Has the presence of foreign firms operating in your industry
had 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-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
0.106***
(0.034)
0.122***
(0.045)
0.135***
(0.051)
297
297
297
ATT
No. of matched pairs
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
0.280***
0.459***
0.489***
(0.072)
(0.074)
(0.088)
392
392
392
ATT
No. of matched pairs
Acquisitions induce rapid changes
(c) Output
(d) Employment
6.00
11.40
11.20
11.00
10.80
10.60
10.40
10.20
10.00
5.80
5.60
5.40
t-1
t0
t+1
t+2
(e) Average wage
9.00
8.80
8.60
8.40
8.20
8.00
7.80
7.60
t-1
t0
t+1
t+2
t-1
t0
t+1
t+2
Acquisitions lead to higher
investment
(f) Investment
(g) Investment in machinery
5.00
4.50
4.50
4.00
4.00
3.50
3.50
3.00
3.00
2.50
2.50
2.00
2.00
t-1
t0
t+1
t+2
t-1
t0
t+1
t+2
Acquisitions facilitate integration
into global markets
(i) Import input share
(h) Export share
45
35
40
30
35
30
25
25
20
20
15
15
t-1
t0
t+1
t+2
t-1
t0
t+1
t+2
What foreign owners do not
change
(j) Capital-labor ratio
(k) Skilled labor ratio
0.25
5.00
0.24
4.75
0.23
4.50
0.22
4.25
0.21
4.00
0.20
1
2
3
t-1
4
t0
(l) Capacity utilization
80
75
70
65
60
t-1
t0
t+1
t+2
t+1
t+2
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)
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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 19761989

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 intraindustry 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