The effects of foreign direct investment on domestic firms

TLDR

The study examines how foreign direct investment affects the productivity of domestic firms in Bulgaria, Romania, and Poland, asking whether foreign firms outperform domestic ones and whether they generate spillovers. Using a unique firm‑level panel dataset on foreign ownership, the authors estimate a fixed‑effects model with instrumental‑variable GMM to control for endogeneity of ownership and spillovers. Foreign firms outperform domestic firms only in Poland, and across all three countries there are no positive spillovers; instead, Bulgaria and Romania experience negative spillovers, indicating that competition outweighs technology transfer. JEL classification: D24, F14, O52, P31.

Abstract

This paper uses firm‐level panel data to investigate empirically the effects of foreign direct investment on the productivity performance of domestic firms in three emerging economies of Central and Eastern Europe: Bulgaria, Romania and Poland. To this end, a unique firm‐level panel dataset is used with detailed information on foreign ownership at the firm level. Two main questions are addressed in the present paper: (1) do foreign firms perform better than their domestic counterparts? (2) do foreign firms generate spillovers to domestic firms? The estimation technique in this paper takes potential endogeneity of ownership, spillovers and other factors into account by estimating a fixed effects model using instrumental variables in the general methods of moment technique for panel data. Only in Poland, do foreign firms perform better than firms without foreign participation. Moreover, for all three countries studied here, I find no evidence of positive spillovers to domestic firms, on average. In contrast, on average, there are negative spillovers to domestic firms in Bulgaria and Romania, while there are no spillovers to domestic firms in Poland. This suggests a negative competition effect that dominates a positive technology effect. JEL classification: D24, F14, O52, P31.