Distance to the Efficiency Frontier and Foreign Direct Investment Spillovers

Abstract

Are firms in the former communist economies converging to the world standard? This is the key question in the most challenging economic transformation at the start of this century. While expert opinions differ on what constitutes a successful and complete transition, it is generally acknowledged that transition economies need to raise their productivity substantially in order to catch up with the advanced countries.1 In this chapter, we show how much progress has been made in reducing the distance between the efficiency of domestic firms and the world technology frontier in two transition economies — the Czech Republic and Russia — and we assess whether the presence of foreign firms in these countries contributes to the reduction of the productivity gap (either through knowledge spillovers or competition).