'The Effect of FDI On Domestic Firms Evidence From

The Effects of Direct Foreign Investment on Domestic
Firms: Evidence from Firm Level Panel Data in

Emerging Economies
By: Jozef Konings
Working Paper Number 344
October 2000
William Davidson Institute Working Paper 344
The Effects of Direct Foreign Investment on Domestic Firms: Evidence from

Firm Level Panel Data in Emerging Economies
By Jozef Konings
LICOS, Centre for Transition Economics
Economics Department
Catholic University of Leuven
De Beriotstraat 34
3000 Leuven
Belgium
Other affiliations: CEPR, London; Dartmouth College, USA

Email: jozef.konings@econ.kuleuven.ac.be
August 2000
Acknowledgements: This paper is part of a project on DFI in Central and Eastern

Europe, funded by the Thyssen foundation. I appreciate comments from Filip
Abraham, Lode Berlage, Hans Degryse, Nina Pavnic, Koen Schoors, Hylke
Vandenbussche and Reinhilde Veugelers. This paper benefited from seminars at the
KULeuven, the University of Gent, the University of Antwerp (Ufsia) and the IMF. I
thank Giulia Faggio and Frederic Warzynski for assistance.
Non-Technical Summary
The collapse of communism in Central and Eastern Europe and the emergence
of a market economy has led to a large inflow of direct foreign investment (DFI) in
the region during the last decade and in particular since the mid 90s. Given the
enormous increase in foreign investment, these countries provide an ideal natural
experiment for measuring the impact of incoming foreign investment on performance.
In particular, this paper uses firm level panel data to investigate empirically the effects
of DFI 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 data set 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?
There are various reasons why many policy makers believe DFI is beneficial
to their country. A first reason is the need for strategic restructuring in firms in the
emerging countries. Most firms in the emerging economies of the former Soviet block
were characterised by obsolete machinery and outdated production methods. To
compete in a market environment, firms had to improve their efficiency by engaging
in strategic restructuring, i.e. updating the equipment and production process. Foreign
firms have the technological know-how and finance necessary to update the
equipment and bring about such strategic restructuring. Foreign participation in
domestic firms has the additional benefit that it can impose an efficient corporate
governance in privatized firms, often privatized to insider workers/managers, who
might block restructuring. A second important reason why foreign investors are
invited to emerging countries rests on the believe that they generate positive
externalities to the domestic firms through a transfer of know-how and technology.

Such spillovers can occur through various channels: the introduction of new products
and production processes by foreign firms may benefit domestic firms through the
accelerated diffusion of new technology. This could occur through labour turnover or
through imitation or other channels. One other channel works through the
equilibrating mechanism in the market when liberalization, here the opening up of
Central and Eastern Europe to the rest of the world, is implemented.
The positive externalities generated by foreign investors, however, may vanish
if the increased competition from foreign firms leads to a reduction in the production
of the domestic firm, which may lead to an increase in the average costs of
production. In this case a negative competition effect may dominate a positive
technological spillover effect. In this paper, the net effect is studied.
Only in Poland, I find that foreign firms perform better than firms without
foreign participation. In Bulgaria and Romania, no robust evidence is found of a
positive foreign ownership effect. This may be due to the fact that it takes time for
firms to restructure and that the effects of restructuring on productivity performance
only appear after a few years. Since Bulgaria and Romania are less advanced in the
transition process compared to Poland this may be a plausible explanation.
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.
Abstract
This paper uses firm level panel data to investigate empirically the effects of
direct foreign investment (DFI) 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 data set 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, I find that 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

Keywords: Foreign Investment, Spillovers, Emerging countries, Panel data
I. Introduction
This paper uses firm level panel data to investigate empirically the effects of
direct foreign investment (DFI) on the productivity performance of domestic firms in
three emerging economies of Central and Eastern Europe, Bulgaria, Romania and
Poland. The collapse of communism in Central and Eastern Europe and the
emergence of a market economy has led to a large inflow of DFI in the region during
the last decade and in particular since the mid 90s. Figure 1 shows the evolution of
DFI since 1991 for the three countries that I study in this paper, where the level of
DFI is normalized to 1 in 1991. By 1998 there was almost 10 fold increase in DFI in
Bulgaria compared to 1991, for Romania and Poland there was even a 50 and 60 fold
increase in DFI by 1998.
DFI Bulgaria
DFI Romania
DFI Poland
60
50
40
30
20
10
0
1990
1992
1994
year
1996
1998
evolution of direct foreign investment in B, R and P

Figure 1 (source: authors calculations based on EBRD (2000))
Policy makers in the emerging economies were faced with a collapsing state
sector and a slowly growing private sector. With financial markets and commercial
banking virtually absent, they encouraged foreign investors to take part in the
privatization process or to invest in their countries. Given the enormous increase in
foreign investment in these countries as illustrated in figure 1, these countries provide
an ideal natural experiment for measuring the impact of incoming foreign investment
on performance.
There are various reasons why many policy makers believe DFI is beneficial
to their country. A first reason is the need for strategic restructuring in firms in the
emerging countries1. Most firms in the emerging economies of the former Soviet
block were characterised by obsolete machinery and outdated production methods. To
compete in a market environment, firms had to improve their efficiency by engaging
in strategic restructuring, i.e. updating the equipment and production process (e.g.
Irina Grossfeld and Grard Roland, 1996). Foreign firms have the technological
know-how and finance necessary to update the equipment and bring about such
strategic restructuring. Foreign participation in domestic firms has the additional
benefit that it can impose an efficient corporate governance in privatized firms, often
privatized to insider workers/managers, who might block restructuring (Olivier
Blanchard, 1997, pp.77-88).
Klaus Wallner (1998) shows theoretically that especially in the emerging
countries, characterized by soft budget constraints, foreign investment is welcomed to
achieve such strategic restructuring as the presence of foreign investors gives
governments incentives to reduce subsidies to firms because otherwise a part of the
Strategic restructuring refers to improving the long run viability and efficiency of a firm.
subsidy may disappear in foreign pockets. Hence, the hardening of budget

constraints increases effort by managers to restructure more.
A second important reason why foreign investors are invited to emerging
countries rests on the believe that they generate positive externalities to the domestic
firms through a transfer of know-how and technology. Such spillovers can occur
through various channels. David J. Teece (1977) argues that the introduction of new
products and production processes by foreign firms may benefit domestic firms
through the accelerated diffusion of new technology. This could occur through labour
turnover or through imitation or other channels. One other channel works through the
equilibrating mechanism in the market when liberalization, here the opening up of
Central and Eastern Europe to the rest of the world, is implemented.
A number of recent theoretical papers show that the degree to which domestic
firms may benefit from such spillovers depends on the absorptive capacity of
domestic firms. Franseca Sanna-Randacio (1999) and D. Leahy and Peter Neary
(1999) show that DFI always leads to an increase in the productivity of the investing
firm, however, DFI increases the host countrys productivity only if the degree of the
technological spillover is high enough. The latter is more likely achieved in sectors
characterized by intensive R&D or by firms which have a sufficient amount of
knowledge to start with.
This has been suggested in earlier empirical work. Ari Kokko (1994) and
Borensztein, De Gregorio and Lee (1998) give evidence which suggests that positive
DFI spillovers to local firms are only generated if the technology gap between the
foreign firm and the domestic one is not too large and if there exists a minimum
threshold of human capital in the host country.
The technological spillovers thus lead to positive effects on domestic firms,

however, there may exist a competition effect which works in the opposite direction.
Foreign entry disturbs the existing market equilibrium and could force domestic firms
to produce less output which pushes them up their average cost curves, at least if
average cost curves are downward sloping, which would be the case if production
involves a substantial fixed cost. This argument has been developed by Brian J.
Aitken and Ann E. Harrison (1999). Which effect dominates depends on the stength
of the technological spillover effect (and the absorptive capacity of firms) versus the
competition effect.
In this paper I analyse a number of questions: First, I test whether foreign
owned subsidiaries in transition economies perform better than their domestically
owned counterparts. Second, I test whether there exist spillovers to domestic firms. I
will look at the net spillover effect, i.e. the sum of the technological spillover and
the competition effect. In addition, I will make a distinction between sectoral and
regional spillovers. I also test whether foreign firms benefit from the presence of other
foreign firms in their sector or region.
I use a unique panel data set of over 5000 firms in Bulgaria, Romania and
Poland for the years 1993-972. Together these countries cover more than 70 million
people and hence these economies are an important part of the Central and Eastern
European Economies. Bulgaria and Romania are lagging behind Poland in the
transition towards a market economy. While all three countries have experienced a
substantial collapse in output at the start of transition, only Poland has reached GDP
levels comparable to the pre-transition years and has positive growth rates. Both
Bulgaria and Romania experienced a short period of positive growth in the mid 90s,
except for Romania data run from 1994 onwards.
however, output has collapsed again in Bulgaria since 1995 and in Romania since
1997.
Because I use panel data I am able to track the same firm over time and hence
I am able to control for unobserved firm level fixed effects, like for example the
quality of the firm. Hence, as in Aitken and Harrison (1999) I am able to control for
the potential endogeneity of foreign ownership and spillovers . Moreover, I will use
the general methods of moments technique to estimate panel data as introduced by
Arellano and Bond (1991) which allows me to construct instruments for potentially
endogenous explanatory variables. This may be important if productivity shocks
affect the levels of the input variables in a production function or if they affect
spillovers. In that case fixed effects alone cannot properly control for the endogeneity.
Furthermore, this technique allows me to estimate dynamic equations in a consistent
way.
The next section describes the data and econometric approach, section III
gives the results and section IV is a concluding one.
II.
Data and Econometric Approach
Data
The data set that is used provides information on 2321 firms in Bulgaria
between 1993-97, 3844 firms in Romania between 1994-87 and 262 firms in Poland
over the period 1993-1997. Due to a lot of missing observations on some of the input
factors needed in the estimation, the total available number of firms for the estimation
in Poland is much lower than in Bulgaria and Romania. The data are unbalanced
panel data, however, attrition is likely to be random due to imperfect reporting, rather
10
than exit of firms. The data consists of the company accounts of all incorporated
firms in both the manufacturing and the non-manufacturing sectors satisfying at least
one of the following criteria: number of employees greater than 100, total assets and
operating revenues exceeding 16 million and 8 million USD, respectively. They are
retrieved from annual company accounts published by the Creditreform Bulgaria
OOD and by the Romanian Chamber of Commerce and Industry3.
Foreign firms are defined as firms where a positive fraction of the shares is
owned by a foreign investor in 1997. In the sample, around 10% of the firms have a
foreign investor in 1997. For those firms with a foreign partner, the average fraction
of shares held by foreign investors is 61%, 59% and 73% for Bulgaria, Romania and
Poland respectively. Thus if a domestic firm has a foreign investor, on average, the
foreign investor has a majority stake.
Econometric Approach and Measurement Issues
I follow Brian Aitken and Ann Harrison (1999) and estimate a log-linear
production function at the firm level to test whether (1) foreign firms perform better
than domestic ones, (2) there exist spillovers from DFI to local production. In
particular, the following specification is the starting point of my analysis:
yit = i + 1nit + 2kit + 3mit + 4t + 5 DFIi + 6 DFIiXTi + 7 Spilljt + it
(1)
Data are available on the Amadeus CD-ROM (Dec. 1998), a Pan European financial database,
provided by Bureau van Dijk Electronic Publishing SA.
11
where subscript i stands for firm i, subscript t for year t, y is log output, n is the log
employment, k is the log of capital and m is the log of material inputs. Output is
measured as sales at the firm level deflated by an aggregate price index. Sector level
price indices were not available on a consistent basis for the countries studied here, so
an aggregate producer price index was used for Romania and Poland, an aggregate
consumer price index for Bulgaria as there was no reliable producer price index
available for Bulgaria. These price indices were taken from the EBRD annual
transition report (EBRD, 2000). The capital stock is proxied by the book value of
tangible fixed assets in the firm, deflated by an aggregate price index. Finally,
material inputs are proxied by material costs have also been deflated by an aggregate
price index.
To capture possible common aggregate shocks in production, like
technological progress or some other unobserved time varying factors I include time
effects, . The fraction of shares held by a foreign investor is denoted by DFI. It can
be noted that this variable has no time subscript, t, which is due to the fact that we
only observe ownership in the year 1997. I also interact foreign ownership with the
time trend to capture the fact that the effect of foreign ownership might affect both the
level and the growth in productivity. This might be the case if it takes some time for
foreign know-how to spillover to the local firm. Finally, Spill measures the sector
level spillovers that arise from foreign investors. I proxy it by the share of output
accounted for by foreign firms in total output at the 2-digit NACE sector level4. I will
also report results in which both sectoral and regional spillovers are taken into
account. The latter are measured as the fraction of output produced by foreign firms in
total output of a particular region. Finally, , is a white noise error term.
NACE is the standard European sector classification, which is comparable to the SIC classification.
12
Table 1 provides summary statistics on the variables that were used in the
regression analysis. It can be noted that on average real sales are collapsing in
Bulgaria which is consistent with the macro economic decline in GDP since 1995. In
contrast, average real sales in Romania are growing rapidly, which is consistent with
the fast growth rates in GDP noted since the mid 90s (until 1997, after which output
collapsed again). In Poland average real sales are growing at a more modest rate, but
the initial catch up took place earlier since transition started earlier in Poland. In
absolute terms, the average growth in employment is always lower than the average
growth in sales, which confirms the observed aggregate stylized fact that the
adjustment in employment is much slower than the adjustment in output. From the
summary statistics it can also be noted that the average spillover effect is around 10%,
however this may vary substantially between sectors.
In equation (1), there is an unobservable fixed effect, i , which captures firm
specific heterogeneity. Such an unobservable fixed effect is potentially correlated
with the other explanatory variables. If it is not controlled for in the estimation, then
inconsistent estimates due to an omitted variable bias result. One way of controlling
for these fixed effects is by first differencing equation (1). At the same time, it is a
way to control for potential endogeneity of foreign ownership, i.e. foreign investors
might only acquire shares in the better firms. If I categorise firms in good versus
bad firms then the unobserved fixed effect captures this and hence it is possible to
avoid an endogeneity bias. First differencing equation (1) yields
yit = 1nit + 2 kit + 3mit + 4t + 6 DFIi + 7 spilljt + it
(2)
13
The above modelling strategy allows me to test whether foreign firms perform
better and whether spillovers are present. However, equation (2) does not allow me to
test whether foreign firms benefit in a different way from spillovers than domestic
firms. It may be possible that foreign firms benefit from other foreign firms in their
sector, while domestic firms do not as in Aitken and Harrison (1999). For this reason I
will include an interaction term in equation (2), where I interact foreign ownership
with spillovers.
There is, however, a further econometric concern. An estimation by OLS of

equation (2) may still lead to inconsistent estimates. This would be the case if
productivity shocks have an effect on the input factors employed in the firm.
Alternatively, productivity shocks may have an effect on spillovers, which would lead
to an endogeneity of the spillovers. Furthermore, equation (2) is a static equation,
allowing for some dynamic adjustment in output (in case of the presence of
adjustment costs) would imply that equation (2) needs to be estimated with a lagged
dependent variable which leads to further endogeneity problems.
To avoid inconsistent estimates I therefore estimate equation (2) using the
General Methods of Moments technique (GMM) with Instrumental Variables as
developed by Arellano and Bond (1991) for estimating dynamic panel data. The
advantage of this method over other commonly used panel data estimation techniques
lies in its efficient use of the number of instruments generated for the endogenous
explanatory variables. For instance, in equation (2), valid instruments for the
differenced employment in the year 97 is the level of employment in the year 95 since
this is not correlated with the differenced error term in 1997. Table 2 shows in a
14
systematic way how the number of instruments increases as the panel progresses. In
1995 a valid instrument for a first differenced endogenous explanatory variable is its
level in 1993, in 1996 valid instruments for the same variable includes its level in
1993 and its level in 1994 and so on. So as the panel progresses an increasing number
of instruments becomes available which increases the efficiency of the estimation. In
order to test the validity of instruments a Sargan test of instrument validity is
computed and is asymptotically 2 distributed. In addition, since the equation is
estimated in first differenced form, the equation will show first-order serial
correlation. However, what matters is the absence of second order serial correlation if
the error term in the levels equation (1) is white noise. Therefore a test of second
order serial correlation is reported and is asymptotically N(0,1) distributed.
III.
Results
Tables 3, 4 and 5 show the results for Bulgaria, Romania and Poland
respectively. I show both OLS estimates and GMM IV estimates for equation (2).
Since the equation is estimated in first-differences I also control for unobserved fixed
effects.
Starting with Bulgaria, the OLS estimates in column (1) of table 3 show no
statistically significant effect of foreign ownership on performance. This may come
across as a surprising result, however, in the context of transition economies it has
been shown that privatised firms do not perform better than state owned enterprises,
because it may take time before restructuring feeds through on firm performance (e.g.
Konings, 1997; Faggio and Konings, 1999). There is however a statistically
significant negative spillover effect of foreign firms on domestic ones, which suggests
15
that a competition effect is dominating a technological spillover effect. The

interaction term, foreign X spillover, suggests that foreign firms benefit from the
presence of other foreign firms in the sector. However, this equation does not take
into account the potential endogeneity of spillovers and of the other input factors.
In the second column I therefore instrument all the input factors as well as the
spillover effect using the moment restrictions suggested by the GMM technique
(Arellano and Bond, 1991). A number of interesting results emerge. First, there still
exist negative spillovers from DFI to domestic firms. The coefficient that is estimated
with spillovers is equal to 0.67. Thus, a sector that has an increase in spillovers from
0 to 10% would experience a decline in total factor productivity of 6.7% on average.
This suggests that the competition effect is dominating, which means that domestic
firms, due to the increased competition from foreign firms in their sector, are pushed
up their average cost curves due to a reduction in output they can produce. This would
hold in case domestic firms have a declining average cost curve, i.e. in the presence of
increasing returns to scale. Based on the estimates of the coefficients of the input
factors, this hypothesis seems to be plausible. The sum of the coefficients of the input
factors is larger than 1 which suggests increasing returns to scale in production or a
declining average cost curve. Note, also that the coefficient on capital is low and
statistically not significant at conventional levels. In the context of transition
economies this is not surprising as most firms are characterised by outdated
equipment and a lack of investment in new equipment, which decreases the marginal
productivity of capital.
A second result, which is the same as in the OLS estimation, is that foreign
firms do not outperform domestic ones. Finally, the interaction effect between foreign
ownership and spillovers is no longer statistically significant, albeit still positive.
16
These IV results suggest that endogeneity may have been important in driving some
of the results in the OLS regression. The Sargan test and the second order serial
correlation test in collumn (2) all indicate that the model is correctly specified. The
fact that there is no second order serial correlation suggests that there is no further
dynamics to be specified in the model.
The third column tests whether regional spillovers may matter. As argued by
Aitken and Harrison (1999) there may be reasons to expect that any benefits to
domestic firms from foreign ivestment would be received first by their neighbors
before they diffuse to other domestic firms. One mechanism through which this may
occur is through job mobility. Workers who worked with a multinational that leave
the firm to work in a domestic one are more likely to move to another firm within the
same region. Job reallocation in transition countries (and elsewhere) occurs primarily
within regions rather than across regions (e.g. Faggio and Konings, 1999). I measure
regional spillovers as the fraction of output produced by foreign firms in a given
region in the total output produced by a given region. The results in column (3),
however, show no statistically significant effect of regional spillovers to domestic
firms in Bulgaria. Since Bulgaria is a small open economy regional effects are
presumably less important in terms of competition, rather the entire Bulgarian market
is more likely to be the appropriate market to consider.
The results for Romania are reported in table 4 and are very similar to the
results for Bulgaria, except that there is some hidden dynamics which needs to be
taken into account. In column (1) the OLS results suggest that foreign firms
outperform domestic ones, that domestic firms experience positive spillovers and that
foreign firms do not benefit from other foreign firms in their sector that much as
domestic ones. However, the second order serial correlation test suggests that the
17
model is not correctly specified in terms of the dynamics. In addition, there may also
be an endogeneity problem related to some of the explanatory variables.
In column (2) of table 4 I therefore report the results using instruments for the
input factors and for the spillovers. The results of column (2) show no statistically
significant effects of spillovers and foreign ownership. However, again the
diagnostics suggest that the model is misspecified, i.e. the Sargan test of instrument
validity and the second order serial correlation test reject the model specification.
Column (3) therefore estimates a dynamic model, including the lagged dependent
variable as one of the regressors. Since the model is estimated in first differences, the
lagged dependent variable is also endogenous and therefore needs to be instrumented
too, using all available moment restrictions from t-2 backwards. In column (3) the
Sargan test accepts the model specification, the second order serial correlation test
could no longer be computed since one time observation is lost due to the lagged
dependent variable and the fact that the data for Romania only go from 1994 onwards,
rather than 1993. However, since the lagged dependent variable is statistically
significant, it is likely that this controls for the initial problem of second order serial
correlation. The results indicate that spillovers from foreign firms to domestic ones
are negative. The results in column (3) suggest that once properly controlled for the
dynamics in the model, again the same negative spillover effects show up. The
interaction effect between foreign firms and spillovers is no longer statistically
significant, just like foreign ownership in itself is no longer statistically significant.
This is consistent with the empirical literature that has shown that privatisation did not
lead to better firm performance and that it may take some time before firms start to
engage in restructuring.
18
Finally, in column (4) I test for the presence of regional spillovers. As in

Bulgaria, I find no statistically significant effect of regional spillovers on domestic
firms.
Table 5 shows the results for Poland. Since I lost a lot of observations in the
estimation due to missing data on material costs, the Polish sample is much smaller
than the one used for Bulgaria and Romania, so the results for Poland need to be read
with caution. The first column gives the OLS results. I find a statistically significant
effect of foreign ownership on firm productivity performance. This contrasts with
Bulgaria and Romania where I found no effect of foreign ownership. In the case of
Poland, however, it may make sense that foreign firms outperform domestic ones
since Poland is in a more advanced stage of development towards a market economy.
If it takes time for firms to restructure then one may expect that in less developed
countries, such as Bulgaria and Romania, foreign firms do not outperform domestic
ones, while in the more advanced ones, such as Poland, the restructuring effects have
come through which is reflected in the positive effect of foreign ownership. In column
(1) I find no statistically significant effect of spillovers.
In column (2) I report the GMM IV estimates. The same results hold as in the
OLS case, i.e. foreign firms outperform domestic ones or to put it differently, a firm
that would change its ownership structure from 0% foreign participation to 100%
foreign participation, total factor productivity would increase by approximately 20%.
This result confirms the hypothesis that foreign firms or joint ventures have some
superior knowledge and/or technology which allows them to be more efficient than
their domestic counterparts. It is also consistent with the idea that foreign firms induce
restructuring at the firm level which leads to higher productivity (Wallner, 1998).
19
Again I find no statistically significant effect of spillovers. This may be due to

the fact that the technological positive externality and the negative competition
effect cancel eachother out, or, it may be due to the fact that there are no increasing
returns to scale which would imply that there is no declining average cost curve. The
latter makes sense, based on the estimates of the coefficients of the input factors.
Rather decreasing returns to scale seem to hold on average, with the only statistically
significant input factor being material costs. This is plausible as most firms in
transition countries are still characterised by over-manning levels and an outdated
capital stock. Moreover, since transition has started earlier in Poland than in Romania
and Bulgaria, the initial increase in competitive pressure at the start of transition was
experienced at an earlier stage, such that the competition effect in the case of Poland
is likely to be much lower than in the case of Bulgaria and Romania.
Finally, in column (3) I also test for the presence of regional spillovers.
However, the only significant effect I find is the material costs of production. Also
foreign ownership is no longer statistically significant at conventional levels. This is
most likely due to multicollinearity of the data, given that only 262 observations are
used in the estimation. For this reason I estimated the equation again, but leaving out
the interaction terms between foreign ownership and spillovers. In column (4) the
results are reported and show that as before foreign firms do better than domestic
ones. In addition, I find evidence of negative regional spillovers, albeit only
significant at the 10% level, but still no evidence of spillovers at the sectoral level.
20
IV. Conclusion
This paper studied the effects of direct foreign investment on the performance
of firms in three emerging market economies, Bulgaria, Romania and Poland. Two
main questions were addressed. First, do foreign firms perform better than their
domestic competitors and second, does foreign investment generate spillovers to
local firms?
I find evidence that foreign firms do not perform better than domestic ones,
except in Poland, the more advanced transition economy. This suggests that it may
take time for ownership effects to have an effect on performance, due to lags in
restructuring. In addition, I find no evidence of positive spillovers, but rather negative
or no spillovers of foreign investment to domestic firms. This is rationalised through a
competition effect that dominates a technological spillover effect in Bulgaria and
Romania, which would hold under the assumption of increasing returns to scale
(declining average cost curves). The competition effect may dominate the technology
effect if the technology gap is too large, which would be the case in less advanced
countries such as Bulgaria and Romania.
The results in this paper suggest that in the early stages of transition, the stages
Bulgaria and Romania are in, the increased competition from DFI dominates
technological spillovers to domestic firms. It suggests that inefficient firms will loose
market share due to foreign competition, which in the long run should increase the
overall efficiency of an economy. In the latter stages, when domestic firms have
engaged in substantial restructuring and market competition has been established, the
dominating competition effect seems to vanish. Whether in the longer run
21
technological spillover effects start dominating, leading to positive spillovers is a

topic for future research when more years of data will become available.
22
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Levinsohn, James (1999). Employment Responses to International Liberalization in

Chile, Journal of International Economics, Vol. 47, pp. 321-344.
Repkine, Alexandre and Walsh, Patrick P. (1999). Evidence of European Trade and
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Mimeo SITE, Stockholm School of Economics.
24
Table 1: Summary Statistics (means of the sample)
sectoral spillover
regional spillover
sales growth
employment growth
capital growth
material growth
Bulgaria
0.09
0.10
-0.27
-0.039
-0.287
-0.25
Romania
0.13
0.11
0.47
-0.042
0.10
0.50
Poland
0.15
0.12
0.07
-0.01
0.03
0.03
Table 2 : Available instruments in GMM technique

Endogenous explanatory variable
Available instruments
xi 95, xi 94, xi 93
xi 97
1997
xi 94, xi 93
xi 96
1996
xi 93
xi 95
1995
Note: x refers to any of the explanatory variables that is treated as endogenous.
25
independent
variables:
n
k
m
DFI
sector spill
DFI x sector spill
Region spill
DFI x region spill
Table 3: Results for Bulgaria

Dependent variable: y
OLS
IV
IV
0.127*
(0.038)
0.047*
(0.011)
0.626*
(0.023)
-0.03
(0.026)
-0.206*
(0.091)
3.528*
(1.473)
-
0.538*
(0.175)
0.012
(0.038)
0.720*
(0.072)
-0.112
(0.113)
-0.670*
(0.360)
6.199
(12.184)
-
0.560*
(0.187)
0.018
(0.039)
0.738*
(0.075)
-0.176
(0.136)
-0.678*
(0.371)
5.225
(12.40)
-0.175
(0.206)
5.061
(5.825)
30.1 (df=29)
-0.025
4,662
Sargan Test
31.18 (df=31)
SOC test
0.248
-0.103
number of
4,662
4,662
observations
Notes: (i) all equations include time dummies, (ii) heteroscedastic consistent standard
errors in brackets, (iii) * denotes significant at the 5% level, ** at the 10% level, (iv)
instruments include some or all available moment restrictions of the endogenous
explanatory variables as well as region dummies.
26
independent
variables:
yt-1
Table 4: Results for Romania

OLS
IV
IV
-
0.134*
(0.017)
0.081*
(0.011)
0.604*
(0.017)
0.01*
(0.002)
0.201*
(0.083)
-32.52*
(12.1)
-
0.245*
(0.073)
0.04**
(0.026)
0.660*
(0.036)
0.04
(0.003)
0.436
(0.459)
-8.937
(12.07)
-
0.138*
(0.034)
0.106*
(0.06)
0.043*
(0.02)
0.411*
(0.04)
0.001
(0.02)
-1.101*
(0.528)
-21.06
(66.92)
-
DFI x region spill
Sargan Test
SOC test
number of
observations
Notes: as in table 3
-3.708
10,955
15.14 (df=6)
-3.872
10,955
60.3 (df=45)
7,111
n
k
m
DFI
sector spill
DFI x sector spill
Region spill
IV
0.144*
(0.035)
0.094**
(0.063)
0.043*
(0.02)
0.421*
(0.044)
0.128
(0.17)
-0.934**
(0.579)
-14.8
(72.5)
0.063
(0.128)
-2.93
(4.18)
59.27 (df=43)
7,111
27
independent
variables:
n
Table 5: Results for Poland

OLS
IV
0.01
(0.14)
0.017
(0.03)
0.429*
(0.081)
0.178*
(0.08)
-0.253
(0.324)
1.14
(2.162)
-
0.022
(0.121)
0.017
(0.087)
0.487*
(0.129)
0.215*
(0.097)
0.174
(0.790)
3.175
(4.835)
-
DFI x region spill
Sargan Test
SOC test
number of
observations
Notes: as in table 3
0.171
340
12.77 (df=16)
0.536
340
k
m
DFI
sector spill
DFI x sector spill
Region spill
IV
IV
0.062
(0.108)
0.059
(0.083)
0.613*
(0.094)
0.13
(0.11)
-0.191
(0.689)
-1.84
(8.34)
-0.377
(0.327)
1.77
(10.84)
19.03 (df=20)
0.07
340
0.03
(0.11)
0.06
(0.067)
0.527*
(0.079)
0.145*
(0.062)
-0.172
(0.721)
-0.48**
(0.301)
16.92 (df=21)
0.391
340
28
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November 1998
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May 2000
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Michael Alexeev and James Leitzel
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Lawrence Peter King
October 1999
April 1998
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and Yijiang Wang
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Terrell
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Albert Park and Kaja Sehrt
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Bernard Black, Reinier Kraakman and

Anna Tarassova
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Randall K. Filer, Jan Hanousek and Nauro

Campos
Arnoud W.A Boot and Jonathan R. Macey
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September 1999
September 1999
Nauro F. Campos, Gerard Hughes, Stepan

Jurajda, and Daniel Munich
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Yasheng Huang
September 1999
Erik Berglof and Ernst-Ludwig von
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Developing Countries
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No. 252: Organizational Law as Asset
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Gerard Roland and Thierry Verdier
Jiahua Che
May 1999
June 2000
Gary H. Jefferson
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Glen Dowell, Stuart Hart and Bernard

Yeung
June 1999
Patrick A. Puhani
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December 1998
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Enrico C. Perotti
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July 1999

financial isolation in Romania

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No. 233: Theories of Soft Budget Constraints
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No. 232: Unemployment Risk, Precautionary
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No. 231: Investing in Turbulent Times: The
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No. 229: Back to the Future: The Growth
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Reconsidered
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Russia
Economics, Ownership Concentration and
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Republic 27(3), September 1999, pp. 498513.
No. 226: Unemployment Benefit Entitlement
and Training Effects in Poland during
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Case Studies
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and Towards EU Accession: A Comparison
of Manufacturing Firms in Poland, Romania,
and Spain
No. 223: Product Market Competition in
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and Consumer Loyalty
John E. Jackson, Jacek Klich, and

Krystyna Poznanska
Keith D. Brouthers and Gary Bamossy
April 1998
June 1999
John E. Jackson, Jacek Klich, Krystyna

Poznanska
July 1998
John E. Jackson and Aleksander S.

Marcinkowski
Andrzej Bratkowski, Irena Grosfeld, Jacek
Rostowski
March 1997
Lubomr Lzal
June 1999
John Bonin
June 1999
Janet Mitchell
March 1999
Alessandra Guariglia and Byung-Yeon

Kim
Josef C. Brada, Arthur E. King, and ChiaYing Ma
June 1999
Josef C. Brada and Ali M. Kutan
April 1999
Nauro F. Campos
April 1999
Simeon Djankov
April 1999
Stijn Claessens and Simeon Djankov
April 1999
Patrick A. Puhani
March 1999
Hans Brechbuhl and Sonia Ferencikova
March 1999
Wendy Carlin, Saul Estrin, and Mark

Schaffer
March 1999
Mitsutoshi M. Adachi
March 1999

April 1999
April 1999

No. 222: Opaque Markets and Rapid Growth:

the Superiority of Bank-Centered Financial
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No. 221: Technology Spillovers through
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No. 220: Managerial, Expertise and Team
Centered Forms of Organizing: A CrossCultural Exploration of Independence in
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No. 219: Household Structure and Labor
Demand in Agriculture: Testing for
Separability in Rural China
No. 218: Competing Strategies of FDI and
Technology Transfer to China: American and
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No. 217 Published in: Journal of Comparative
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Transition to a Market Economy Vol. 27, No.
1, March 1999, pp. 4No. 216 Published in: Journal of Comparative
Economics, Labor Market Policies and
Unemployment in the Czech Republic. Vol.
27, No. 1, March 1999, pp. 33-60.
Economics, Active Labor Market Policies in
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Stigmatization or Benefit Churning? Vol. 27,
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113No. 213 Published in: Journal of Comparative
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Programs on the Transition Rate from
Unemployment into Regular Jobs in the
Slovak Republic. Vol. 27, No. 1, March
1999, pp. 90No. 212: The Marketing System in Bulgarian
Livestock Production The Present State and
Evolutionary Processes During the Period of
Economic Transition
No. 211: Bankruptcy Experience in Hungary
and the Czech Republic
No 210: Values, Optimum Stimulation Levels
and Brand Loyalty: New Scales in New
Populations
No. 209: Inherited Wealth, Corporate Control
and Economic Growth
No. 208: A Cultural Analysis of Homosocial
Reproduction and Contesting Claims to
Rodney Wallace
July 1999
Yuko Kinoshita
January 1999
Leslie Perlow
January 1999
Audra J. Bowlus and Terry Sicular
January 1999
W. Mark Fruin and Penelope Prime
January 1999
Tito Boeri and Christopher J. Flinn
January 1999
Katherine Terrell and Vit Sorm
November 1998
Jochen Kluve, Hartmut Lehmann, and

Christoph M. Schmidt
December 1998
Milan Vodopivec
December 1998
Martina Lubyova and Jan C. van Ours
December 1998
Yordan Staykov, Team Leader
October 1998
Janet Mitchell
October 1998
Steven M. Burgess and Mari Harris
September 1998
Randall K. Morck, David A. Stangeland,

and Bernard Yeung
Michael D. Kennedy
September 1998

July 1998

Competence in Transitional Firms

No. 207: From Survival to Success: The
Journey of Corporate Transformation at Haier.
Forthcoming in Teaching the Dinosaurs to
Dance: Organizational Change in Transition
Economies ed. Daniel Denison.
No. 206: Why Do People Work If They Are
Not Paid? An Example from Eastern Europe.
No. 205: Firm Ownership and Work
Motivation in Bulgaria and Hungary: An
Empirical Study of the Transition in the Mid1990s. Forthcoming in Teaching the
Dinosaurs to Dance: Organizational Change in
Transition Economies ed. Daniel Denison.
No. 204: Human Resource Management in the
Restructuring of Chinese Joint Ventures.
No. 203: Emergent Compensation Strategies
in Post-Socialist Poland: Understanding the
Cognitive Underpinnings of Management
Practices in a Transition Economy.
No. 202: Corporate Transformation and
Organizational Learning: The Peoples
Republic of China. Forthcoming in Teaching
the Dinosaurs to Dance: Organizational
Change in Transition Economies ed. Daniel
Denison.
No. 201: Foreign Direct Investment as a
Factor of Change: The Case of Slovakia.
No. 200: Radical versus Incremental Change:
The Role of Capabilities, Competition, and
Leaders. Forthcoming in Teaching the
No. 199: The Emergence of Market Practices
in Chinas Economic Transition: Price Setting
Practices in Shanghais Industrial Firms.
No. 198: The Application of Change
Arthur Yeung and Kenneth DeWoskin
July 1998
Irina L. Zinovieva
May 1998
Robert A. Roe, Irina L. Zinovieva,

Elizabeth Dienes, and Laurens A. ten Horn
May 1998
Nandani Lynton
April 1998
Marc Weinstein
March 1998
Meinolf Dierkes and Zhang Xinhua
March 1998
Sonia Ferencikova
February 1998
Karen L. Newman
February 1998
Douglas Guthrie
February 1998
Dr. Jnos Fehr
January 1998


Management Methods at Business

Organizations Operating in Hungary:
Challenges in the Business and Cultural
Environment and First Practical Experiences.
No. 197: Organizational Changes in Russian
Industrial Enterprises: Mutation of DecisionMaking Structures and Transformations of
Ownership. Forthcoming in Teaching the
No. 196: Understanding and Managing
Challenges to the Romanian Companies
during Transition. Forthcoming in Teaching
the Dinosaurs to Dance: Organizational
Change in Transition Economies ed. Daniel
Denison.
No. 195: Insider Lending and Economic
Transition: The Structure, Function, and
Performance Impact of Finance Companies in
Chinese Business Groups. Forthcoming in
Teaching the Dinosaurs to Dance:
Organizational Change in Transition
No. 194: Japanese Investment in Transitional
Economies: Characteristics and Performance.
No. 193: Building Successful Companies in
Transition Economies. Forthcoming in
Teaching the Dinosaurs to Dance:
Organizational Change in Transition
No. 192: Russian Communitariansim: An
Invisible Fist in the Transformation Process of
Russia. Forthcoming in Teaching the
No. 191: Teaching the Dinosaurs to Dance
No. 190: Strategic Restructuring: Making
Capitalism in Post-Communist Eastern
Europe. Forthcoming in Teaching the
No. 189: Published in: Regional Science and
Urban Economics, Russias Internal Border,
29 (5), September 1999.
No. 187: Corporate Structure and Performance
in Hungary
Igor B. Gurkov
January 1998
Dan Candea and Rodica M. Candea
January 1998
Lisa A. Keister
December 1997
Paul W. Beamish and Andrew Delios
November 1997
Dr. Ivan Perlaki
January 1998
Charalambos Vlachoutsicos
July 1998
Michal Cakrt
Lawrence P. King
September 1997
September 1997
July 1998
Lszl Halpern and Gbor Krsi
July 1998


No. 186: Performance of Czech Companies by

Ownership Structure
No. 185: Firm Performance in Bulgaria and
Estonia: The effects of competitive pressure,
financial pressure and disorganisation
No. 184: Investment and Wages during the
Transition: Evidence from Slovene Firms
No. 183: Investment Portfolio under Soft
Budget: Implications for Growth, Volatility
and Savings
No. 181: Delegation and Delay in Bank
Privatization
No. 180: Financing Mechanisms and R&D
Investment
No. 179: Organizational Culture and
Effectiveness: The Case of Foreign Firms in
Russia
No. 178: Output and Unemployment
Dynamics in Transition
No. 177: Published in: Economics of
Transition,, Bureaucracies in the Russian
Voucher Privatization Vol. 8, No. 1, 2000,
pp. 37-57.
No. 176: Chronic Moderate Inflation in
Transition: The Tale of Hungary
No. 175: Privatisation and Market Structure in
a Transition Economy
No. 174: Ownership and Managerial
Competition: Employee, Customer, or Outside
Ownership
No. 173: Intragovernment Procurement of
Local Public Good: A Theory of
Decentralization in Nondemocratic
Government
No. 172: Political Instability and Growth in
Proprietary Economies
No. 171: Published in Post-Communist
Economies, Framework Issues in the
Privatization Strategies of the Czech Republic,
Hungary, and Poland Vol. 11, no. 1 March
1999.
No. 170: Published in: European Journal of
Political Economy Privatization, Ownership
Structure and Transparency: How to Measure
a Real Involvement of the State 15(4),
November 1999, pp. 605-18.
No. 169 Published in: American Economic
Review, Unemployment and the Social
Safety Net during Transitions to a Market
Economy: Evidence from Czech and Slovak
Men. Vol. 88, No. 5, Dec. 1998, pp. 11171142.
Andrew Weiss and Georgiy Nikitin
June 1998
Jozef Konings
July 1998
Janez Prasnikar and Jan Svejnar
July 1998
Chongen Bai and Yijiang Wang
July 1998
Lornd Ambrus-Lakatos and Ulrich Hege
July 1998
Haizhou Huang and Chenggang Xu
July 1998
Carl F. Fey and Daniel R. Denison
January 1999
Vivek H. Dehejia and Douglas W. Dwyer
January 1998
Guido Friebel
June 1998
Jnos Vincze
June 1998
John Bennett and James Maw
June 1998
Patrick Bolton and Chenggang Xu
June 1998
Chong-en Bai, Yu Pan and Yijiang Wang
June 1998
Jody Overland and Michael Spagat
August 1998
Morris Bornstein
June 1998
Frantisek Turnovec
May 1998
John C. Ham, Jan Svejnar, and Katherine

Terrell
December 1998


No. 167: Voucher Privatization with

Investment Funds: An Institutional Analysis
No. 166: Published in: Marketing Issues in
Transitional Economies, Value Priorities and
Consumer Behavior in a Transitional
Economy: The Case of South Africa ed.
Rajeev Batra.
No. 164: Finance and Investment in
Transition: Czech Enterprises, 1993-1994
No. 163: European Union Trade and
Investment Flows U-Shaping Industrial
Output in Central and Eastern Europe: Theory
and Evidence
No. 162: Skill Acquisition and Private Firm
Creation in Transition Economies
No. 161: Corruption in Transition
No. 160a: Tenures that Shook the World:
Worker Turnover in Russia, Poland and
Britain
No. 160: Tenures that Shook the World:
Worker Turnover in the Russian Federation
and Poland
No. 159: Does Market Structure Matter? New
Evidence from Russia
No. 158: Structural Adjustment and Regional
Long Term Unemployment in Poland
No. 157: Baby Boom or Bust? Changing
Fertility in Post-Communist Czech Republic
and Slovakia
No. 156 Published in: Leadership and
Organization Development Journal, Leading
Radical Change in Transition Economies.
Vol. 19, No. 6, 1998, pp. 309-324.
No. 155 Published in: Oxford Review of
Economic Policy, From Theory into
Practice? Restructuring and Dynamism in
Transition Economies. Vol. 13, No. 2,
Summer 1997, pp. 77-105.
No. 154: The Model and the Reality:
Assessment of Vietnamese SOE Reform
Implementation at the Firm Level
Economics, Causes of the Soft Budget
Constraint: Evidence on Three Explanations.
Vol. 26, No. 1, March 1998, pp. 104-116.
No. 152 Published in: Comparative Economic
Studies, Enterprise Restructuring in Russias
Transition Economy: Formal and Informal
Mechanisms. Vol. 40, No. 2, Summer 1998,
pp. 5-52.
No. 151: Labor Productivity in Transition: A
Regional Analysis of Russian Industry
David Ellerman
March 1998
Steven M. Burgess and Jan-Benedict E.M.

Steenkamp
August 1998
Ronald Anderson and Chantal Kegels
September 1997
Alexander Repkine and Patrick P. Walsh
April 1998
Zuzana Brixiova and Wenli Li
October 1999
Susanto Basu and David D. Li

Hartmut Lehmann and Jonathan
Wadsworth
May 1998
November 1999
Hartmut Lehmann and Jonathan

Wadsworth
June 1998
Annette N. Brown and J. David Brown
June 1998
Hartmut Lehmann and Patrick P. Walsh
June 1997
Robert S. Chase
April 1998
Karen L. Newman
June 1998
Wendy Carlin and Michael Landesmann
June 1997
Edmund Malesky, Vu Thanh Hung, Vu

Thi Dieu Anh, and Nancy K. Napier
July 1998
David D. Li and Minsong Liang
March 1998
Susan J. Linz and Gary Krueger
April 1998
Susan J. Linz
May 1998


No. 150: Tax Avoidance and the Allocation of

Credit. Forthcoming in Financial Systems in
Transition: The Design of Financial Systems
in Central Europe eds. Anna Meyendorff and
Anjan Thakor.
No. 149: Commitment, Versatility and
Balance: Determinants of Work Time
Standards and Norms in a Multi-Country
Study of Software Engineers
No. 148: Changes in Polands Transfer
Payments in the 1990s: the Fate of Pensioners
No. 147: Environmental Protection and
Economic Development: The Case of the
Huaihe River Basin Cleanup Plan
No. 146: Chief Executive Compensation
During Early Transition: Further Evidence
from Bulgaria
No. 145 Published in: Economics of
Transition, Womens Unemployment During
the Transition: Evidence from Czech and
Slovak Micro Data, Vol. 7, No. 1, May 1999,
pp. 47-78.
No. 144: Investment and Wages in Slovenia
No. 143 Published in: Review of Financial
Studies, Optimal Bankruptcy Laws Across
Different Economic Systems, 12(2), Summer
1999, pgs. 347-77.
No. 142: Industrial Policy and Poverty in
Transition Economies: Two Steps Forward or
One Step Back?
No. 141: Collective Ownership and
Privatization of Chinas Village Enterprises
No. 140: A Comparative Look at Labor
Mobility in the Czech Republic: Where have
all the Workers Gone?
No. 139: The Failure of the Government-Led
Program of Corporate Reorganization in
Romania
No. 138: Ownership and Employment in
Russian Industry: 1992-1995
No. 137 Published in: Journal of Political
Economy, Reform Without Losers: An
Interpretation of Chinas Dual-Track
Approach to Transition, Feb. 2000; Vol. 108,
Iss.1; pg. 120
No. 136 Published in: European Economic
Review, The Political Economy of Mass
Privatization and the Risk of Expropriation,
44(2), February 2000, pgs. 393-421
No. 135: Radical Organizational Change: The
Role of Starting Conditions, Competition, and
Leaders
Anna Meyendorff
June 1998
Leslie Perlow and Ron Fortgang
April 1998
Bozena Leven
June 1998
Robert Letovsky, Reze Ramazani, and

Debra Murphy
June 1998
Derek C. Jones, Takao Kato, and Jeffrey

Miller
June 1998
John Ham, Jan Svejnar, and Katherine

Terrell
May 1998
Janez Prasnikar
Elazar Berkovitch and Ronen Israel
May 1998
March 1998
Susan J. Linz
March 1998
Suwen Pan and Albert Park
April 1998
Vit Sorm and Katherine Terrell
April 1999
Simeon Djankov and Kosali Ilayperuma
September 1997
Susan J. Linz
March 1998
Lawrence J. Lau, Yingyi Qian, and Gerard

Roland
November 1997
Klaus M. Schmidt
March 1998
Karen L. Newman
January 1998


No. 134: To Restructure or Not to Restructure:

Informal Activities and Enterprise Behavior in
Transition
No. 133: Management 101: Behavior of Firms
in Transition Economies
No. 132 Published in: Quarterly Journal of
Economics, Interfirm Relationships and
Informal Credit in Vietnam, 114(4), Nov.
1999, pgs. 1285-1320
Studies, Will Restructuring Hungarian
Companies Innovate? An Investigation Based
on Joseph Berliners Analysis of Innovation in
Soviet Industry. Vol. 40, No. 2, Summer
1998, pp. 53-74.
No. 130: Published in The American
Economic Review, Changing Incentives of
the Chinese Bureaucracy. May, 1998.
No. 129: Restructuring Investment in
Transition: A Model of the Enterprise
Decision
Studies, Job Rights in Russian Firms:
Endangered or Extinct Institutions? Vol. 40,
No. 4, Winter 1998, pp. 1-32.
No. 127: Accounting for Growth in PostSoviet Russia
No. 126 Published in: Economics of
Transition, From Federalism, Chinese Style,
to Privatization Chinese Style, 7(1), 1999,
pgs. 103-31
No. 125: Market Discipline in Conglomerate
Banks: Is an Internal Allocation of Cost of
Capital Necessary as Incentive Device?
Forthcoming in Financial Systems in
Transition: The Design of Financial Systems
in Central Europe eds. Anna Meyendorff and
Anjan Thakor.
No. 124: Financial Discipline in the Enterprise
Sector in Transition Countries: How Does
China Compare?
No. 123: Considerations of an Emerging
Marketplace: Managers Perceptions in the
Southern African Economic Community
No. 122: A Model of the Informal Economy in
Transition Economies
No. 121: Local Labour Market Dynamics in
the Czech and Slovak Republics
No. 119: Institutional Upheaval and Company
Transformation in Emerging Market
Economies
No. 118: Industrial Decline and Labor
Clifford Gaddy and Barry W. Ickes
May 1998
Josef C. Brada
March 1998
John McMillan and Christopher Woodruff
February 1998
John B. Bonin and Istvan Abel
March 1998
David D. Li
January 1998
Richard E. Ericson
January 1998
Susan J. Linz
January 1998
January 1998
Yuanzheng Cao, Yingyi Qian, and Barry

R. Weingast
December 1997
Arnoud W. A. Boot and Anjolein Schmeits
November 1997
Shumei Gao and Mark E. Schaffer
February 1998
Brent Chrite and David Hudson
February 1998
Simon Commander and Andrei

Tolstopiatenko
Peter Huber and Andreas Worgotter
November 1997
November 1997
Karen L. Newman
March 1998
John S. Earle
October 1997


Reallocation in Romania
No. 117: Notes for an Essay on the Soft
Budget Constraint
No. 116: Labor Demand During Transition in
Hungary
No. 115: Enterprise Performance and
Managers Profiles
No. 114b Employment and Wages in
Enterprises under Communism and in
Transition: Evidence From Central Europe and
Russia
No. 114: Employment and Wage Behavior of
Enterprises in Transitional Economies
No. 113: Preliminary Evidence on Active
Labor Programs Impact in Hungary and
Poland
No. 111: Unemployment Benefits and
Incentives in Hungary: New Evidence
No. 110: Published in: Empirical Economics,
Long-Term Unemployment, Unemployment
Benefits and Social Assistance: The Polish
Experience Empirical-Economics; 23(1-2),
1998, pages 55-85.
No. 109 Published in: Industrial and Labor
Relations Review, Markets for Communist
Human Capital: Returns to Education and
Experience in Post-Communist Czech
Republic and Slovakia. Vol. 51, No. 3, April
1998, pp. 401-423.
No. 107: The Worker-Firm Matching in the
Transition: (Why) Are the Czechs More
Successful Than Others?
Economics, Job Creation, Job Destruction
and Growth of Newly Established, Privatized
and State-Owned Enterprises in Transition
Economies: Survey Evidence from Bulgaria,
Hungary, and Romania, Vol. 26, No.3,
September 1998, pp. 429-445.
No. 105: Getting Behind the East-West
[German] Wage Differential: Theory and
Evidence
No. 104: The Birth of the Wage Curve in
Hungary, 1989-95
Economics, Grime and Punishment: Job
Insecurity and Wage Arrears in the Russian
Federation 27, 595-617 (1999).
No. 102: Social Networks in Transition
No. 101: Depreciation and Russian Corporate
Finance: A Pragmatic Approach to Surviving
Lorand Ambrus-Lakatos
January 1997
Gabor Korosi
October 1997
Simeon Djankov and Stijn Claessens
December 1997
Swati Basu, Saul Estrin, and Jan Svejnar
April 2000
Swati Basu, Saul Estrin, and Jan Svejnar
October 1997
Christopher J. OLeary
October 1997
Joachim Wolff
October 1997
Marek Gora and Christoph M. Schmidt
April 1997
Robert S. Chase
October 1997
Daniel Mnich, Jan Svejnar, and Katherine

Terrell
October 1997
Valentijn Bilsen and Jozef Konings
September 1998
Michael Burda and Christoph Schmidt
May 1997
Gabor Kertesi and Janos Kollo
October 1997
Hartmut Lehmann, Jonathan Wadsworth,

and Alessandro Acquisti
October 1997
Lorena Barberia, Simon Johnson, and

Daniel Kaufmann
Susan J. Linz
October 1997

November 1997

the Transition
No. 100: Romanian Financial System Reform
No. 99: Proceedings of the Conference on
Strategic Alliances in Transitional Economies,
held May 20, 1997 at the Davidson Institute
No. 98: Institutions, Strain and the
Underground Economy
No. 97: Structure and Strain in Explaining
Inter-Enterprise Arrears
No. 96: Resource Misallocation and Strain:
Explaining Shocks in Post-Command
Economies
No. 95: Published in: Finance-a-Uver, Czech
Money Market: Emerging Links Among
Interest Rates. 48(2) 1998 pp. 99-109.
No. 94: Pre-Reform Industry and the
State Monopsony in China
No. 93: Chinas State-Owned Enterprises
In the First Reform Decade:
An Analysis of a Declining Monopsony
No. 92: Expatriate Management in the Czech
Republic
No. 91: China and the Idea of Economic
Reform
No. 90 Published in: China Economic Review,
Chinas State Enterprise Reform: An
Overseas Perspective. Vol. 8, Spring 1997,
pp. 89-98.
No. 89: The Economic Determinants of
Internal Migration Flows in Russia During
Transition
No. 88: Gender Wage Gaps in Chinas Labor
Market: Size, Structure, Trends
No. 87: Privatisation in Central and Eastern
Europe
No. 86: Published in : Economics of
Transition, The Effect of Privatization on
Wealth Distribution in Russia. v. 7, no. 2,
1999, pp. 449-65
No. 85: Was Privatization in Eastern Germany
a Special Case? Some Lessons from the
Treuhand
No. 84: Start-ups and Transition
No. 83: Which Enterprises (Believe They)
Have Soft Budgets after Mass Privatization?
Evidence from Mongolia
No. 82: Published in: European Economic
Review, Unemployment Dynamics and the
Restructuring of the Slovak Unemployment
Benefit System. April, 1997.
No. 81: Determinants of Unemployment
Duration in Russia
Anna Meyendorff and Anjan V. Thakor

Edited by Cynthia Koch
November 1997
May 1997
Daniel Daianu and Lucian Albu
November 1997
Daniel Daianu
November 1997
Daniel Daianu
November 1997
Jan Hanousek and Evzen Kocenda
November 1997
Xiao-Yuan Dong and Louis Putterman
October 1997
Xiao-Yuan Dong and Louis Putterman
October 1997
Richard B. Peterson
September 1997
Thomas G. Rawski
April 1997
Thomas G. Rawski
July 1997
Annette N. Brown
July 1997
Margaret Maurer-Fazio, Thomas G.

Rawski, and Wei Zhang
Saul Estrin
July 1997
Michael Alexeev
February 1998
Uwe Siegmund
September 1997
Daniel M. Berkowitz and David J. Cooper

James Anderson, Georges Korsun, and
Peter Murrell
September 1997
October 1997
Martina Lubyova and Jan C. van Ours
June 1997
Mark C. Foley
August 1997

June 1997

No. 80: The Many Faces of Information

Disclosure
No. 79: Published in: Journal of Finance,
Foreign Speculators and Emerging Equity
Markets.v.22, iss. 2, 2000, pp. 565-613
No. 78: The Relationship Between Economic
Factors and Equity Markets in Central Europe
No. 77 Published in: Economics of Transition,
A Gini Decomposition Analysis of Inequality
in the Czech and Slovak Republics During the
Transition, Vol. 6, No.1, May 1998, pp. 2346.
No. 76: Chinas Emerging Market for Property
Rights: Theoretical and Empirical
Perspectives
No. 75b: Test of Permanent Income
Hypothesis on Czech Voucher Privatization
No. 74: Determinants of Performance of
Manufacturing Firms in Seven European
Transition Economies
No. 73 Published in: Economics of Transition,
The Restructuring of Large Firms in Slovak
Republic. Vol. 6, No. 1, May 1998, pp. 6785
No. 72: Law, Relationships, and Private
Enforcement: Transactional Strategies of
Russian Enterprises
No. 71: Giving Credit Where Credit Is Due:
The Changing Role of Rural Financial
Institutions in China
No. 70: Privatization Versus Competition:
Changing Enterprise Behavior in Russia
No. 69: Russian Managers under Storm:
Explicit Reality and Implicit Leadership
Theories (A Pilot Exploration)
No. 68: The Political Economy of CentralLocal Relations in China: Inflation and
Investment Controls During the Reform Era
No. 67: Between Two Coordination Failures:
Automotive Industrial Policy in China with a
Comparison to Korea
No. 66 Published in: Post-Soviet Geography
and Economics, Red Executives in Russias
Transition Economy. Vol. 27, No. 10,
November 1996, pp. 633-651.
No. 65 Published in: Industrial and Corporate
Change, On the Sequencing of Privatization
in Transition Economies. Vol. 7, No. 1,
1998.
No. 64: Published in: Journal of Law and
Economics, Foreign Ownership and
Profitability: Property Rights, Control and the
Arnoud W.A. Boot and Anjan V. Thakor
October 1997
Geert Bekaert and Campbell R. Harvey
August 1997
Jan Hanousek and Randall K. Filer
June 1997
Thesia I. Garner and Katherine Terrell
May 1998
Gary H. Jefferson and Thomas G. Rawski
June 1997
Jan Hanousek and Zdenek Tima
October 1997
Stijn Claessens, Simeon Djankov, and

Gerhard Pohl
February 1997
Simeon Djankov and Gerhard Pohl
May 1998
Kathryn Hendley, Peter Murrell, and Randi

Ryterman
November 1998
Albert Park, Loren Brandt, and John Giles
March 1997
John S. Earle and Saul Estrin
Spring 1997
Igor Gurkov
October 1998
Yasheng Huang
Spring 1997
Yasheng Huang
Spring 1997
Susan J. Linz
January 1997
Gautam Ahuja and Sumit K. Majumdar
April 1997
Pradeep K. Chhibber and Sumit K.

Majumdar
April 1997


Performance of Firms in Indian Industry

42(1), April 1999, pp. 209-38.
No. 63: How Taxing Is Corruption on
International Investors?
No. 62: What Can We Learn from the
Experience of Transitional Economies with
Labour Market Policies?
No. 61: Published in: Accounting
Organizations and Society, Economic
Transition, Strategy and the Evolution of
Management Accounting Practices: The Case
of India 24(5,6), Jul/Aug 1999, pp. 379-412.
No. 60a: Enterprise Investment During the
Transition: Evidence from Czech Panel Data
No. 59: Published in: Journal of Law,
Economics, and Organization, Institutional
Environment, Community Government, and
Corporate Governance: Understanding
Chinas Township-Village Enterprises. 14(1),
April 1998, pages 1-23
No. 58: From the Grabbing Hand to the
Helping Hand
No. 57: Published in: Brookings Papers on
Economic Activity, The Unofficial Economy
in Transition. 1: 1998.
No. 56: Taxes and Government Incentives:
Eastern Europe vs. China
No. 55: Corruption and Reform
No. 54: Decentralization and the
Macroeconomic Consequences of
Commitment to State-Owned Firms
No. 53: Published in: The International
Journal of Industrial Organization,
Competitive Shocks and Industrial Structure:
The Case of Polish Manufacturing. August,
1999. .
No. 52: Published in: The Quarterly Journal of
Economics, Insecure Property Rights and
Government Ownership of Firms. May,
1998.
No. 51: Incentives, Scale Economies, and
Organizational Form
No. 50: Published in: Post-Soviet-Affairs,
End of the Tunnel? The Effects of Financial
Stabilization in Russia April-June 1997,
pages 105-33
No. 49: The Evolution of Bank Credit Quality
in Transition: Theory and Evidence from
Romania
No. 48: Where Do the Leaders Trade?
Information Revelation and Interactions
Between the Segments of Czech Capital
Shang-Jin Wei
February 1997
Tito Boeri
1997
Shannon W. Anderson and William N.

Lanen
April 1997
Lubomr Lizal and Jan Svejnar
December 1997
Jiahua Che and Yingyi Qian
April 1997
Jiahua Che
June 2000
Simon Johnson, Daniel Kaufmann, and

Andrei Schleifer
June 1997
Roger H. Gordon and David D. Li
April 1997
Susanto Basu and David Li

Loren Brandt and Xiaodong Zhu
June 1996
June 1997
Pankaj Ghemawat and Robert E. Kennedy
May 1997
Jiahua Che and Yingyi Qian
May 1997
Eric Maskin, Yingyi Qian, and Chenggang

Xu
Barry W. Ickes, Peter Murrell, and Randi
Ryterman
May 1997
Enrico C. Perotti and Octavian Carare
October 1996
Jan Hanousek and Libor Nemecek
May 1997

March 1997

Markets
No. 47: Firms Heterogeneity in Transition:
Evidence from a Polish Panel Data Set
No. 46: Strategic Creditor Passivity,
Regulation, and Bank Bailouts
No. 45a: Published in: Journal of Public
Economics, Tax Rights in Transition
Economies: A Tragedy of the Commons. 76,
2000, pp. 369-397
No. 44a: The Information Content of Stock
Markets: Why do Emerging Markets have
Synchronous Stock Price Movements?
(forthcoming in the Journal of Financial
Economics).
No. 43: Agency in Project Screening and
Termination Decisions: Why Is Good Money
Thrown After Bad?
Transition, Channels of Redistribution:
Inequality and Poverty in the Russian
Transition. Vol. 7 (2) 1999.
Transition, Labour Market Characteristics
and Profitability: Econometric Analysis of
Hungarian Exporting Firms, 1986-1995 6(1),
May 1998, pages 145-62
No. 40: Published in: the Harvard Law
Review, The Tragedy of the Anticommons:
Property in the Transition from Marx to
Markets. January 1998.
No. 39: Privatization and Managerial
Efficiency
No. 38 Published in: The Quarterly Journal of
Economics, Disorganization. Vol. 112, No.
4, November 1997, pp. 1091-1126.
Transition, Transition and the Output Fall.
7(1), 1999, pages 1-28.
No. 36: Restructuring an Industry During
Transition: A Two-Period Model
No. 34: The East-West Joint Venture: BC
Torsion Case Study
Economics, Quantifying Price Liberalization
in Russia. Vol. 26, No. 4, December 1998,
pp. 735-737.
No. 32: What Can North Korea Learn from
Chinas Market Reforms?
No. 31: Published in : China-EconomicReview, Towards a Model of China as a
Partially Reformed Developing Economy
Under a Semifederalist Government. , 9(1),
Irena Grosfeld and Jean-Franois Nivet
May 1997
Janet Mitchell
May 1997
Daniel M. Berkowitz and Wei Li
September 1997
Randall Morck, Bernard Yeung, and

Wayne Yu
February 1999
Chong-en Bai and Yijiang Wang
May 1997
Simon Commander, Andrei

Tolstopiatenko, and Ruslan Yemtsov
May 1997
Lszl Halpern and Gabor Korosi
May 1997
Michael Heller
February 1997
Olivier Debande and Guido Friebel
May 1997
Olivier Blanchard and Michael Kremer
January 1997
Grard Roland and Thierry Verdier
March 1997
Richard Ericson
September 1996
Sonia Ferencikova and Vern Terpstra
December 1998
Daniel Berkowitz, David DeJong, and

Steven Husted
December 1998
John McMillan
September 1996
Yijiang Wang and Chun Chang
March 1997


Spring 1998, pages 1-23.

No. 30: Convergence in Output in Transition
Economies: Central and Eastern Europe,
1970-1995
Transition, Altered Band and Exchange
Volatility. Volume 6, no. 1, 1998, 173-181.
No. 28: Published in: Quarterly Journal of
Economics, Public Versus Private Ownership
of Firms: Evidence from Rural China.
Volume 113, no. 3, August 1998, 773-808.
No. 27: East-West Joint Ventures in a
Transitional Economy: The Case of Slovakia
No. 26: Published in Economic Analysis
Behavior of a Slovenian Firm in Transition
Vol. 1, no. 1, 1998, 57-73.
No. 25: Cultural Encounters and Claims to
Expertise in Postcommunist Capitalism
No. 24: ZVU a.s.: Investment Funds on the
Board of Directors of an Engineering Giant
No. 23: The Role of Investment Funds in the
Czech Republic (joint publication with Czech
Management Center)
No. 22: Czech Investment Fund Industry:
Development and Behaviour (joint publication
with Czech Management Center)
No. 21: Restructuring of Czech Firms: An
Example of Gama, a.s. (joint publication with
Czech Management Center)
No. 20: YSE Funds: A Story of Czech
Investment Funds (joint publication with
Czech Management Center)
No. 19: Prvn Investicni a.s., The First
Investment Corporation (joint publication
with Czech Management Center)
No. 18: PPF a.s., The First Private Investment
Fund (joint publication with Czech
Management Center)
No. 17 Published in: Post-Soviet Geography
and Economics, Russias Managers in
Transition: Pilferers or Paladins? Vol. 37,
o.7 (September 1996), pp. 397-426.
No. 16: Banks in TransitionInvestment
Opportunities in Central Europe and Russia
Edited Transcript from 31 May 1996
Conference in New York City
No. 15: Marketing in Transitional Economies:
Edited Transcript & Papers from 1 April 1996
Conference in Ann Arbor, Michigan
No. 14: Pensions in the Former Soviet Bloc:
Problems and Solutions. Published by
Council on Foreign Relations. The Coming
Saul Estrin and Giovanni Urga
February 1997
Evzen Kocenda
March 1997
Hehui Jin and Yingyi Qian
January 1997
Sonia Ferencikova
March 1997
Janez Prasnikar
February 1997
Michael D. Kennedy
February 1997
Tory Wolff
August 1995
Dusan Triska
June 1996
Richard Podpiera
May 1996
Antonin Bulin
June 1996
Michal Otradovec
November 1995
Jaroslav Jirasek
August 1995
Michal Otradovec
November 1995
Susan J. Linz and Gary Krueger
November 1996
With commentary and edited by Anna

Meyendorff
January 1997
Compiled by The Davidson Institute
December 1996
Jan Svejnar
November 1996


Global Pension Crisis New York, 1997

No. 13: Enterprise Restructuring and
Performance in the Transition. Forthcoming
in Financial Systems in Transition: The
Design of Financial Systems in Central
Europe eds. Anna Meyendorff and Anjan
Thakor.
No. 12 Published in: Journal of International
Marketing, Executive Insights: Marketing
Issues and Challenges in Transitional
Economies. Vol. 5, No. 4, 1997, pp. 95-114.
Also published in: Marketing Issues in
Transitional Economies ed. Rajeev Batra.
No. 11: Worker Trust and System
Vulnerability in the Transition from Socialism
to Capitalism
Studies, Russian Firms in Transition:
Champions, Challengers, and Chaff. Vol. 39,
No.2, Summer 1997, pp. 1-36.
No. 9: Corporate Debt Crisis and Bankruptcy
Law During the Transition: The Case of China
Economics, A Theory of Ambiguous
Property Rights in Transition Economies: The
Case of the Chinese Non-State Sector. Vol.
23, No. 1, August 1996, pp. 1-19.
No. 7: The Foreign Economic Contract Law of
China: Cases and Analysis
No. 3: Bank Privatization in Hungary and the
Magyar Kulkereskedelmi Bank Transaction
Replacing Nos. 1-2 & 4-6: Journal of
Comparative Economics Symposium on
Bank Privatization in Central Europe and
Russia. Vol. 25, No. 1, August 1997.
Lubomir Lizal, Miroslav Singer, and Jan

Svejnar
December 1996
Rajeev Batra
April 1997
Andrew Schotter
August 1996
Susan J. Linz
July 1996
David D. Li and Shan Li
December 1995
David D. Li
June 1996
Dong-lai Li
June 1993
Roger Kormendi and Karen Schnatterly
May 1996
No. 1 Bank Privatization in Transitional

Economies by Roger Kormendi and
Edward Snyder. No. 2 Transactional
Structures of Bank Privatizations in
Central Europe and Russia by Anna
Meyendorff and Edward A. Snyder. No. 4
Bank Privatization in Poland: The Case of
Bank Slaski by Jeffery Abarbaness and
John Bonin. No. 5 Bank Privatization in
Post-Communist Russia: The Case of
Zhilsotsbank by Jeffery Abarbanell and
Anna Meyendorff and No. 6 The Czech
Republics Commercial Bank: Komercni
Banka by Edward A. Snyder and Roger
C. Kormendi.
August 1997

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The Effects of Direct Foreign Investment on Domestic

Firms: Evidence from Firm Level Panel Data in

William Davidson Institute Working Paper 344

The Effects of Direct Foreign Investment on Domestic Firms: Evidence from

Other affiliations: CEPR, London; Dartmouth College, USA

Acknowledgements: This paper is part of a project on DFI in Central and Eastern

William Davidson Institute Working Paper 344

William Davidson Institute Working Paper 344

externalities to the domestic firms through a transfer of know-how and technology.

William Davidson Institute Working Paper 344

JEL classification: D24, F14, O52, P31

William Davidson Institute Working Paper 344

evolution of direct foreign investment in B, R and P

William Davidson Institute Working Paper 344

William Davidson Institute Working Paper 344

subsidy may disappear in foreign pockets. Hence, the hardening of budget

William Davidson Institute Working Paper 344

The technological spillovers thus lead to positive effects on domestic firms,

except for Romania data run from 1994 onwards.

William Davidson Institute Working Paper 344

Data and Econometric Approach

William Davidson Institute Working Paper 344

Econometric Approach and Measurement Issues

yit = i + 1nit + 2kit + 3mit + 4t + 5 DFIi + 6 DFIiXTi + 7 Spilljt + it

William Davidson Institute Working Paper 344

William Davidson Institute Working Paper 344

yit = 1nit + 2 kit + 3mit + 4t + 6 DFIi + 7 spilljt + it

William Davidson Institute Working Paper 344

There is, however, a further econometric concern. An estimation by OLS of

William Davidson Institute Working Paper 344

William Davidson Institute Working Paper 344

that a competition effect is dominating a technological spillover effect. The

William Davidson Institute Working Paper 344

William Davidson Institute Working Paper 344

William Davidson Institute Working Paper 344

Finally, in column (4) I test for the presence of regional spillovers. As in

William Davidson Institute Working Paper 344

Again I find no statistically significant effect of spillovers. This may be due to

William Davidson Institute Working Paper 344

William Davidson Institute Working Paper 344

technological spillover effects start dominating, leading to positive spillovers is a

William Davidson Institute Working Paper 344

William Davidson Institute Working Paper 344

Levinsohn, James (1999). Employment Responses to International Liberalization in

William Davidson Institute Working Paper 344

Table 1: Summary Statistics (means of the sample)

Table 2 : Available instruments in GMM technique

William Davidson Institute Working Paper 344

Table 3: Results for Bulgaria

William Davidson Institute Working Paper 344

Table 4: Results for Romania

DFI x region spill

William Davidson Institute Working Paper 344

Table 5: Results for Poland

DFI x region spill

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