Foreign Direct Investment and Technology Spillovers: Which Firms Really Benefit?

Sophia Dimelis and Helen Louri

Contents: I. Introduction.- II. Theoretical framework.- III. Model, data and variables.IV. Empirical findings.- V. Concluding remarks.

Remark: The authors acknowledge support from a TMR grant on Foreign Direct Investment and the Multinational Corporation (FMRX-CT-98-0215).

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Foreign Direct Investment and Technology Spillovers: Which Firms Really Benefit?

I. Introduction The impact of Foreign Direct Investment (FDI) on host economies remains one of the most important questions in the international economics literature, faced with renewed interest in recent years. Two main issues dominate the discussion: (a) the efficiency benefits that come along with FDI and may lead to direct increases in local productivity and to indirect improvements in domestic performance through spillovers, and (b) the costs incurred by domestic firms due to the entry of more efficient rivals in the market, which may lead to a reduction in produced output, pushing domestic firms up their average cost curves, thus decreasing productivity. Local conditions, such as the openness of the economy, the institutional framework, the technology gap, the degree of competition, and the skill level of the workforce may also influence the relative size of costs and benefits. Numerous studies have attempted to provide theoretical and empirical answers to the question of the overall impact of FDI on the host economy as determined by such countervailing effects. Theoretical analyses have provided interesting and testable propositions valid under certain conditions and pointing towards a positive overall FDI effect.1 Empirical studies performed at the level of the firm have measured the importance of efficiency benefits enjoyed by foreign firms as well as the extent of spillovers in host markets stemming from foreign presence, resulting in mixed results varying from positive to insignificant or even negative estimates.2 In an attempt to resolve such ambiguities Görg and Strobl (2001) have performed an interesting metaanalysis of the estimated productivity spillovers of FDI as published in earlier empirical studies. These ambiguities are attributed mostly to differences in the research design, the methodology and the type of data (cross-sectional versus panel

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See, for example, Wang and Blomström (1992), Markusen and Venables (1999). See, for example, Oulton (1998), Aitken and Harrison (1999), Blomström and Sjöholm (1999), Chhibber and Majumdar (1999), Sjöholm (1999a; b), Girma et al.(2001), Kokko et.al. (2001), Conyon et. al. (2002), Griffith (2002) and Dimelis and Louri (2002).

among the nineteen published papers they could trace on productivity spillovers of FDI. the market characteristics of which are quite different from the characteristics of a developed economy. of which three are on the UK and the other two on Australia and Canada. for example. More specifically.2 data). Nevertheless. while not generalized effect. Driffield (2001). Subsequently. what are the implications for the particular host economy and policy guidelines towards FDI? The answers to the above questions can be useful to future EU host countries. a small open and developed economy as well as a peripheral country of the EU with an emphasis on the distiction between spillovers from different types of multinationals. See Barrell and Pain (1997). which are interested in knowing what to expect from the establishment of foreign affiliates or how differentiated the expected benefits may be. 5 As shown by Görg and Strobl (2001). Section II explains the theoretical base for the role of foreign ownership in firm 3 4 See. Blomström (1986). On the other hand. only five refer to developed countries. . the questions addressed are related to how differentiated such effects are depending on the size of domestic and foreign firms as well as on the degree of involvement of the foreign partner. which may then be diffused to domestic firms. Is the presence of small and large foreign firms equally beneficial for the local economy? Are small and large domestic and foreign firms benefiting the same from the presence of multinational corporations (MNCs) in their industries.4 Although attempts to measure the aggregate consequences of FDI have supplied rather ambiguous results.5 Hence the need for further studies seeking to provide answers on particular aspects and conditions of the FDI impact on other economies as also argued by Blomström et al. Our study attempts to analyze the net efficiency benefits stemming from FDI in the particular case of Greece. irrespective of the degree of their involvement in ownership? And if the benefits are different. the great majority of empirical studies on FDI spillovers refer to cases where the host country is a developing one. The paper is organised as follows. FDI is thought to bring along new technologies. Davies and Lyons (1991). Following this line of thought it has been suggested that 30% of the growth in UK manufacturing productivity in 1985-94 can be attributed to the presence of FDI. studies conducted at the industry level have revealed positive industry responses under certain industry structures. Kokko (1994). most of the relevant literature favours a positive. (2001) in their review paper.3 At a more aggregate level it has been found that innovating sectors invest more abroad.

employment turnover or direct contact with local agents. There is a large literature on the reasons for which one expects the presence of MNCs to impact positively on the host economy. The public good nature of the knowledge-based assets transferred to the host country is a main source of spillovers. . for example. First. hence their ability to compete successfully although their knowledge of local markets and consumer preferences may be inferior. Such advantages create multi-plant economies of scale which combined with a reduction in transport and/or trade costs when locating close to national markets explain the creation of subsidiaries there (Markusen 1995). Local suppliers and subcontractors may benefit from new technology information disseminated by MNCs in order to satisfy their advanced technical standards. firm specific assets that give rise to cost advantages at the (parent) firm level. Such technology diffusion improves the technical efficiency of domestic firms (Blomström and Kokko 1998). Thus. Section IV presents the empirical results and considers some further econometric issues and section V concludes. the data and the variables used in the estimations. Licensing incurs the double risk of not keeping the quality standards of the parent company and appropriating technology-based secrets. Their higher productive efficiency helps productivity in their industries to shift upwards which is also mirrored in the general productivity of the host economy (Caves 1996). Second. which affect the productivity of domestic firms and provide the longer lasting gains for the host economy. Appropriation of their qualities may take place through reverse engineering. other things being equal. They tend to operate on a lower (production and distribution) cost curve than domestic firms. the supply of skilled labour is consequently increased or information about local market conditions is facilitated. due to higher technology inputs and more efficient organization in production and distribution. ownership of local subsidiaries may be preferred (Cleeve 1997). there are spillovers.3 efficiency and technology spillovers. Theoretical framework MNCs possess knowledge-based. foreign subsidiaries are expected to be more productive than domestic firms. II. Foreign firms may also benefit from enhanced foreign presence in their host industries if. Section III presents the econometric model.

Wang and Blomström (1992) develop a formal model. trade regimes as well as attributes of the local workforce. while learning efforts of domestic firms facilitate the process. since MNCs usually enter markets with high entry barriers and consequently strong oligopolistic rigidities. Their magnitude and scope depend on the development stage of the economy. the higher is the absorptive capacity of and the positive benefits for the host country. Domestic firms.4 Strengthening competition. In another study. . Allocative efficiency in the industry is thus improved. institutional factors. Efficiency enhancing or reducing effects are not evenly spread among industries or countries. Aitken and Harrison 1999). the cost per unit produced is higher since output demanded from them is reduced because foreign firms take over a large part of the market (Haddad and Harrison 1993. are forced to become more efficient in order to keep their market shares. may also be important. Sjöholm (1999b) argues that regional spillovers may be stronger than national spillovers due to exploitation of local linkages. Sjöholm (1999a) finds that spillovers are stronger in Indonesian sectors where domestic competition is higher and technology less advanced. firms in technologically weaker or smaller markets (led to operate at an inefficient scale) are often forced to closure. Blomström and Kokko (1998) maintain that the higher the level of local competence and the more competitive the market environment. A negative effect may be expected if market stealing on behalf of MNCs takes place. since such sectors are already operating at the top of their efficiency. which explores special domestic conditions that facilitate technology transfer. On the other hand. although firms benefit from spillovers and move to a lower average cost curve. Girma. In this case.e. Driffield (2001) argues that the most likely benefit from FDI in the UK is the stimulation of domestic productivity through increased foreign competition. the structure of industries. On the contrary. particular characteristics of the host markets. industries where MNCs operate in isolation from local firms because of high technology gaps and large foreign concentration. Kokko (1994) estimates that spillovers are smaller in Mexican industries with ‘enclave’ characteristics. Blomström and Sjöholm (1999) estimate that spillovers are not significant in Indonesian sectors open to foreign competition. A larger technology gap seems to leave more ground for improvements. Cantwell (1989) notices that the benefits of foreign (US) presence seem to be more obvious in European industries possessing some technological strength. not challenged before by local contenders. i. On the negative side are perceived operation risks.

to our knowledge. a foreign partner has an incentive to increase his ownership share in order to protect his property rights and to control the use of his intangible assets. . their performance is disciplined by international competition and apparently there may be little technical knowledge to be transferred to them from MNCs. they are likely to be more seriously influenced by foreign presence in their industries. Large foreign firms may be better prepared to face their needs on their own. Furthermore. small domestic firms may not be exposed to foreign pressure and may operate at suboptimal efficiency. On the other hand. Finally. especially if they also happen to be large exporters. For this reason. lacking technical know-how that interaction with locally established MNCs may offer them. leakage of important information-based assets to initial partners and future competitors may be significant particularly in R&D intensive industries (Nakamura and Xie 1998. Thus.5 Greenaway and Wakelin (2001) confirm that the impact of FDI in the UK increases the higher the levels of import competition and skills in an industry. the only paper that has attempted to measure differences in FDI spillovers on productivity by plant size and estimated negative effects for small Venezuelan firms attributed to market stealing on behalf of MNCs. al. In this case. thus operating in isolation from the local environment.6 6 Aitken and Harrison (1999) is. property rights acquired with (the degree of) ownership are important in determining the overall impact of FDI. Dimelis and Louri (2002) provide evidence for differentiated spillover effects at various quantiles of the conditional distribution of domestic productivity in Greek manufacturing industry. In a similar analytical framework Kokko et. resulting in higher spillovers. Nevertheless. Interaction is easier with minority foreign ownership because local partners have direct access to information. Spillovers may be limited if foreign subsidiaries are fully or majority owned because interaction with local agents is reduced. and enjoy higher spillover benefits. Subsequently. Barbosa and Louri 2002). domestic firm size may be important in absorbing spillovers. (2001) report FDI spillovers as depending on trade regimes as well as the export orientation of the recipient firms. Hence. Size may also be thought as playing a dual role. Large domestic firms may already be competitive and operating at their maximum efficiency. small foreign firms may be more willing to buy from or subcontract to local firms engaging in more intensive interaction.

However. larger in size or more capital intensive). while the spillover effect by defining the foreign share in employment/sales or other equivalent measure depending on data availability. the effect of foreign ownership on the performance of host firms. leaving out any slope effects which may possibly arise. changes in productivity may arise not only as a result of the foreign presence.g.6 In the great majority of the existing empirical literature. It is along these lines that this study attempts to estimate the direct and indirect effect that MNCs exercise on labour efficiency. Li ) e Σγ j X ij + ei (1) . This implies that productivity models should allow for differentiated effects arising not only from the actual FDI variable but also from industry and firm specific characteristics. output of the ith firm is assumed to be determined by ˆ Zi Z + ei = F ( K i . Fewer studies suggest that foreign ownership may have a significant impact on firm performance only when it crosses a certain threshold providing unambiguous control and being defined by the property rights regime (Chhibber and Majumdar 1999. but also because FDI may be directed to firms or industries of particular characteristics (e. some studies have exploited the availability of more detailed information to estimate if the foreign impact on performance increases monotonically with the degree of foreign ownership (Aitken and Harrison 1999). foreign owners should be permitted full control over firms. data and variables The econometric model adopted for the purpose of this paper. the data used and their statistical properties as well as the definition of variables have as follows: The model Starting with a general form of production function. Model. industries or countries is measured by a dummy variable indicating the foreign presence. The disadvantage of employing a dummy to measure the FDI impact is that it only implies shifts in productivity. If full firm efficiency is to be enjoyed. Li ) e i Yi = F ( K i . Li ) e = F ( K i . Blomström and Sjöholm 1999). To this end. III. The omission of such characteristics from our analysis will most likely create a selection bias problem.

readily tested by the t-statistic of its estimate. 8 For more details on the econometric aspects of production functions. but can be allowed to vary by specifying industry-specific or other dummy variables among the Xj’s reflecting. while "! is proxied by a number of exogenous to production variables Xij the impact of which is denoted by γj. …. considering the above specifications and taking logarithms. γ 0 is a constant parameter corresponding to X0=1. Equation (3) is also more appropriate for estimation since several econometric problems such as heteroscedasticity due to the use of crosssectional data. For empirical purposes. that is "! = Σ γ j Xij. see Intriligator et al.7 where Ki and Li denote the capital and labour inputs respectively of firm i and Zi is assumed to measure exogenous shocks to production which are partially observable ( "! ) and partially random (ei). variations in technology levels. although econometrically. simultaneity due to the endogeneity of production inputs or multicollinearity arising from the interdependence of the two inputs are reduced. we obtain the following econometric equation lnYi = γ 0 + α lnKi + β lnLi+ Σ γ j X ij + ei (2) where α and β are the elasticities of output with respect to capital and labour respectively. the increased complexity resulting from such forms results in luck of robustness in the estimation process. Chapter 8).N 7 More complex forms like CES or translog specifications could also be considered. quite often. management skills. Subsequently. . Additional Xj variables that account for observed heterogeneity among firms or capture possible externalities will also be considered as explained in more details below. we rearrange (2) so as to obtain its labour intensive form ln(Yi /Li) = γ 0 + α ln(Ki /Li) + (α + β –1)lnLi +∑ γj Xij + ei. a simple Cobb-Douglas form7 is specified for the production function F. (1996. Finally. missing variables or various measurement errors. Since our main issues relate to productivity. the error term ei absorbs all stochastic variations in the technological capabilities of firms. etc. (3) where the term ( α+ β-1) measures deviations from constant returns.8 i=1. for example.

According to the theory.12 It is important therefore to 9 Full ownership and the parity option may also be tested as separate foreign ownership categories. the skill level of labour. may also be of importance in determining productivity. some of which have been documented in the literature such as the scale of the firm. To test this assertion. . and financial constraints. 11 Scale is expected to increase productivity. were initially used in the econometric estimations. for measuring the impact of foreign presence on productivity. they are not included in the Xjs described here or in the estimations provided in section IV. The financial variables of leverage and liquidity may reflect either the consequences of financial pressure (Nickell et.00. Nickell and Nicolitsas 1999) or the ability of the firm to exploit investment opportunities (Caballero 1997. Hubbard 1998) both expected to increase efficiency. Min and Maj taking the value of 1 if the share of the foreign firm is ≤ 50% or >50% respectively may replace FDI. A preliminary investigation of the data indicated the existence of statistically significant differences in productivity between small (≤50 employees) and large firms (>50 employees) in particular among the foreign ones. Product market characteristics. No evidence was found of differences in productivity between export-intensive and non-intensive sectors. Since neither was found to be significant. 1992.9 A variable measuring the spillover effect from the presence of foreign owned firms is also included among the regressors. al. Exports have also been suggested. namely labour skills and firm age. namely the leverage of the firm defined as the ratio of short and long-term debt to net worth and the liquidity ratio defined as working capital over total assets. Hence they were integrated in the Maj and the Min ownership variables respectively. 10 Details on the measurement of the spillover effects are provided in the next sub-section. Sectoral data on exports have been used in a working paper by Barrios et al. probably because all manufacturing sectors in Greece (a small open economy) are subject to strong competition from international trade. taken into account by an industry dummy. 12 A Chow test was performed to test the hypothesis of lack of differences in the coefficients of the productivity regression equation between small and large firms. firms may differ in productivity for other reasons. if firms benefit from scale economies (Baldwin 1996). is specified taking as values the percentage of ownership in equity the foreign partner holds in each particular firm. the additional variables Xj considered include a measure of the firm’s scale and two financial variables. FDI. two separate dummy variables. These values therefore will range from 0 if the firm is domestic to 100% if the firm is entirely foreign-owned. different degrees of foreign ownership may cause different shifts at the level of productivity. Given the data availability in our sample. a variable. Ireland and Spain. suggested by the literature as determining productivity. 11 Two more variables.(2002) comparing small groups of firms in Greece.8 More specifically. 10 Furthermore. The hypothesis was rejected at p=0. In our case they did not produce any statistically significant different results from the two options presented.

thus avoiding some sort of heterogeneity bias. In terms of labour productivity. For this reason we control for such effects in the estimations in order to avoid causality problems and obtain an ‘unmixed’ FDI effect. Almost 80% of them are large. almost 3 times as many of the foreign firms (72%) are large. as opposed to 62% of the minority held ones being large. The data The data source is in the published accounts of all Greek manufacturing corporations operating in 1997 as collected and compiled by the data bank of ICAP. There are 207 fully or partially owned foreign firms. The relative presence of foreign firms is more intense (in terms of shares) in chemicals. Financial information together with data on foreign ownership. foreign firms show a noticeable preference for large size and certain high productivity industries. Since we are dealing with a large sample we follow the latter approach and estimate model (3) separately for each group. In terms of size. which reportedly produce more than three quarters of manufacturing sales. or splitting the sample accordingly and perform separate regression estimates. while only 26% of domestic firms are considered to be large (>50 employees). Such sectors show higher productivity. Hence. oil refineries and electric machinery.8 times more productive than domestic firms . The sample is by definition biased towards large-sized firms. In this way we are also able to obtain directly the estimates of the FDI impact on productivity in each group after controlling for a variety of firm specific factors. which despite their small number produce 26% of their industries’ sales.9 control for the size effects exerted on productivity. Table 1 gives a brief description of the sample finally used in terms of industry and size distribution. so the higher presence of foreign firms there may show their preference to locate in sectors where productivity is already high. Controlling for size can be implemented by either pooling small and large firms together and introducing the appropriate dummies for differentiated constant and/or slope effects. Table 2 provides some more information on the ownership preferences of foreign firms indicating that most (113) prefer majority (>50%) ownership. foreign firms are 1. The number of firms used in our econometric estimations is reduced to 3742 (out of 4056) due to missing variables for some firms and the inclusion only of sectors with foreign presence (three sectors in the sample had no foreign presence). which would otherwise be introduced in our estimates. employment and age is provided.

as is typical in the literature. FMIN (minority foreign ownership): Dummy variable equal to 1 if foreign investors own less than or equal to 50% of the equity of firm i. 14 A dummy equal to 1 for foreign firms and 0 for domestic firms was also used. (1992). the econometric model and data availability. large. 13 Value added would be preferable in this context but it was not reported in these accounts. Arguments for the use of sales when value added is not available can be found in Nickell et al. Finally. FDI (foreign ownership share): Percentage of capital equity held by foreign investors in firm i. Mayes (1996) and Oulton (1998) among others. Still. the foreign ownership share is preferred as a variable taking into account more detailed information about the role of foreign presence and is adopted in the estimations reported. nor was it possible to obtain it from another source.1 times more productive than the latter. SCALE (within firms): Size of total assets of firm i (in log form). LIQ (liquidity ratio): Working capital over total assets of firm i (in log form). They are defined as follows: KL (capital labour ratio): Fixed capital over employment of firm i (in log form). in terms of total assets. .14 FMAJ (majority foreign ownership): Dummy variable equal to 1 if foreign investors own more than 50% of the equity of firm i. Variables Output in this paper is measured by sales as reported by the 1997 directory of published company accounts. FDILG (large foreign firms): Dummy variable equal to 1 if foreign firm has more than 50 employees. majority owned foreign firms definitely exceed all other groups. the former being 2.13 The choice of independent variables is determined by the theoretical issues. Its effect was estimated as positive and significant. FDISM (small foreign firms): Dummy variable equal to 1 if foreign firm has less than 50 employees.10 but there are differences between majority and minority held foreign firms. The largest difference in productivity is noticed in the large group between majority held foreign firms and domestic firms. the former being on average 16% more productive than the latter. DEBT (leverage ratio): Short and long term debt over net worth of firm i (in log form).

Empirical findings As a first step. Nevertheless. FKLG (capital share of large foreign firms): Fixed capital belonging to foreign firms with less than 50 employees in industry j over total fixed capital in industry j. This variable measures the spillover effect and is computed at the three-digit industry level. Since the commitment of foreign firms in terms of fixed capital may be a better indicator of the technology they bring along and possibly transfer to local firms. Greenaway and Wakelin.11 FK (share of foreign capital): Fixed capital belonging to foreign firms in industry j over total fixed capital in the same industry. 2001) of foreign firms with respect to the output or employment of their industries.15 FKMAJ (capital share of majority owned foreign firms): Fixed capital belonging to firms with majority foreign ownership in industry j over total fixed capital in the same industry. taking into account different samples and different ways in which FDI spillovers may appear. FKMIN (capital share of minority owned foreign firms): Fixed capital belonging to firms with minority foreign ownership in industry j over total fixed capital in industry j. Industry dummies: Twenty two-digit industry dummies are used. Blomström and Sjöholm. FKSM (capital share of small foreign firms): Fixed capital belonging to foreign firms with less than or equal to 50 employees in industry j over total fixed capital in industry j. Girma. while further considerations on the results are provided in subsequent section. we decided to adopt the fixed capital version as more relevant theoretically. IV. equation (3) was estimated using all firms and the relevant independent variables to check for constant returns to scale. all subsequent regressions were run without this variable. The OLS estimation results are reported below. all three alternatives were tried and provided close results. Since the coefficient of the variable lnLi was not statistically significant different from zero. 1999) or employment (e. it was concluded that the hypothesis of constant returns cannot be rejected and hence. Aitken and Harrison.g. . 1999. Estimation results Tables 3-6 present the White heteroscedasticity corrected productivity estimations (pvalues in parentheses).g. Industry dummies at the two-digit level are included in the reported estimations to control for productivity differences across 15 The spillover variable is most often measured in the literature as a ratio of the output (e.

17 A Chi-squared test was performed and the hypothesis of excluding these extra variables from the model was rejected at p=0. no significant shift in productivity is estimated to be exerted either by the increasing ownership share or by the majority or minority foreign holding dummies. a literal interpretation of the estimation of FDI impact in column 1 would mean that if foreign ownership in a firm increases by 10%. such a positive ownership effect is found to exist only for majority-owned foreign firms. and it is to these estimated effects that we now turn. It is further specified that such an effect stems only from majority owned foreign holdings. productivity is expected to increase by 2. Our estimations in each table come in three groups. when the sample of large firms is used (column 5) the effect of foreign share on firm productivity is found to be positive and larger than in any other estimation.8). When the sample of small firms is used. all firms.12 industries. Firms with minority foreign holdings possess no productivity advantage over their domestic counterparts. Actually. Scale exerts a positive effect on productivity as expected and the two financial variables are found to cause more efficient firm production. No significant differences in productivity are estimated. degree of foreign ownership. On the contrary.3%. small firms and large firms. Although these variables perform well and improve significantly the explanatory ability of the model. . The results obtained following this methodology were very similar to the ones reported. But as seen in column (2) when property rights arguments are taken into account (devolving full control to the foreign partner only when his capital holdings exceed 50%). and foreign penetration in each industry.16 The effects of scale. it does not matter if firms are domestic or foreign and if they have majority or minority foreign interests. the conclusion can be drawn from Table 3 that the positive shift estimated to be exerted by foreign firms on productivity holds only for large 16 Another approach would be to discard the observations in the middle of the size distribution and run our regressions using the upper and lower third of the distribution. our focus of interest is the changing role of foreign presence on productivity depending on firm size. leverage and liquidity are positive and significant in all estimations. In the group of small firms. Thus.00 (X2 = 1783. Ownership does not affect productivity when firms are small.17 Table 3 shows that when the sample of all firms is used a significantly positive effect of FDI on productivity is estimated increasing with the share of foreign ownership.

if their sample includes mainly large firms. As seen in column (1) both the foreign ownership share and the relative presence of foreign firms in each industry (measuring spillovers in terms of fixed capital) exercise a significantly positive effect on productivity of all firms. when all firms are taken into account and more detailed information is used.13 firms and comes mainly from firms where the foreign partner owns at least 51% of the firm equity. because appropriation and dissemination of technological information to domestic partners is easier. positive spillovers are estimated only in the small firm group. such positive externalities stem mainly from firms with minority foreign holdings. it becomes obvious that spillovers are significant only in sectors where foreign firms have minority holdings. the positive productivity shift is found to be caused only by firms with majority foreign holdings. . Still. When tested further. in the large firm group. When estimated separately. Table 5 presents the estimates of the spillover effects on domestic firms only. though. When the estimations are performed for the small (columns 5-8) and large (columns 9-12) firm groups separately. On the contrary. the only significant effect exercised by foreign firms is the spillover effect. as for example in Girma et al. It seems that large domestic firms do not seem to be influenced by the presence of foreign firms in their sectors. the only significant effect of foreign presence on productivity is found to be the positive shift caused by firms in which the foreign partner owns more than 51% of the equity (columns 11 and 12). Spillovers are stronger in these cases. as argued in section 2. information dissemination or even increased competition stemming from FDI than foreign firms in their industries. it is clearly shown that in the small firm group. while the spillovers become significant in sectors where foreign firms have minority holdings. Spillovers stemming from firms with minority foreign holdings reach their largest size in this case. According to the estimates presented in column 4. Table 4 reports the efficiency shifts enjoyed by foreign firms and the spillover effects caused by foreign firms and enjoyed by all firms in our sample (domestic and foreign). In all cases they are smaller than when foreign firms are included (as in table 4) indicating that domestic firms benefit less from technology diffusion. while small firms enjoy positive externalities. The lack of significant spillovers for the large firm group may provide some explanation for similar results of other studies. (2001).

. who found it to be true only for small Venezuelan firms. is robust only for large domestic or foreign firms as opposed to the results of Aitken and Harrison (1999). Further econometric issues When estimating production functions within a static framework as in the previous section.14 Table 6 shows how differentiated the efficiency benefits are depending on the foreign firm size. but is significant only for small domestic and foreign firms especially when stemming from small joint ventures. The largest spillover effect among all estimations (in all tables) is estimated for small domestic firms indicating that a 1% increase in the capital share of foreign firms in their industry would increase the productivity of small domestic firms by almost 2% (column 6). our results of the impact of foreign participation on the host country’s efficiency are robust independent of whether or not we control for industry differences.18 The spillover effects of small and large foreign firms on all domestic firms are of slightly smaller size and significance. the institutional framework and the development stage as well as the degree of openness of the host economy play a significant part in the way the presence of MNCs affects local firms. large firms (domestic or foreign) are not influenced by spillovers as was also the case in table 5. though.20 Furthermore. 19 Despite the relatively large difference in the estimated coefficients a Wald test could not reject the hypothesis of equal coefficients at p=0. The results remained unchanged. Large foreign firms exercise a positive and significant shift on productivity. Contrasting previous evidence. given the existing ambiguity with respect to the net spillover effect of FDI.1. which. these problems are alleviated by using the labor intensive form 18 A Wald test was performed to test for the hypothesis of equal spillover coefficients from small and large foreign firms. The hypothesis was accepted at p=0. in the Greek case. we estimate that it is in general positive. while the effect of small foreign firms is not significant. 20 All regressions were re-estimated without the industry dummies. Finally. The spillover effects. As argued in section 3.32.62. are of a similar size and significance indicating that the presence of both small and large foreign firms in an industry exercises a positive influence on productivity. while such effects are found to be enjoyed only by small firms. our results are in accordance with the general finding of a positive FDI shift on productivity. the well-known problems of multicollinearity and endogeneity may arise. larger (although not significantly so) in the case of small firms. Apparently.19 On the contrary.

Large firms do not benefit from any positive externalities. Concluding remarks The effect of FDI on host economies. is an interesting and timely research subject. the spillover effects estimated with IV keep their significant positive sign. which is confirmed when estimating the differentiated effects exercised by large and small foreign firms as well.21 In an attempt to increase the robustness of our results and given the limitation of our data set. In this case. we were able to trace back those firms from our sample that were operating in 1992. no proper dynamic panel analysis has been employed to deal with the . No noticeable differences in the parameter estimates of the other variables were observed. Using a sample of 3742 Greek manufacturing firms operating in 1997. in particular unbiasedness and consistency. through increases in their productive efficiency. hence supporting the robustness of our estimations. The difference actually becomes significant for firms with a foreign share exceeding 51% and only for the group of large firms. its changing nature according to firm size and degree of foreign ownership was not reported until now. It turns out that the estimated coefficients are close to the heteroscedasticity corrected OLS estimates appearing in Tables 4 and 6. nevertheless the obtained estimates may lack some of the required properties. we re-estimated our regressions applying the IV procedure on the sample of firms operating in both years and the results are shown in Tables 7 and 8. 5. These problems are faced adequately by the use of instrumental variable (IV) techniques when a time dimension of the cross-sectional data is provided and. while a general positive net effect is expected. Thus. of course. in the case of panel data. it was found that foreign firms are more productive than domestic firms and this difference increases the higher the foreign ownership share. While a positive overall effect is suggested in the relevant literature under certain conditions. When spillovers are taken into account. it becomes evident following our estimations that significant positive spillovers stem only from firms with minority foreign ownership and are enjoyed exclusively by the small firm group.15 of equation (3). V.5% of which are foreign (fully or partially) owned. using the 1992 values of the exogenous variables as instruments. despite the availability of panel data in some empirical studies on FDI productivity spillovers. while it is found that large foreign firms are more efficient than 21 It is surprising though that. Actually.

promote technology diffusion because they need to interact with small local agents. Girma et al. 1999. causing the largest spillovers. which become the recipients of such externalities. .16 their small counterparts. 2001). where large domestic firms are probably quite competitive being familiar with import and export procedures. Aitken and Harrison. it may be suggested that policies seeking to attract FDI and create long-run positive effects for host economies should aim preferably at small joint ventures where local partners have an increased presence. e. Such spillovers become important when joint ventures with domestic firms are formed where the foreign partner does not have full control. productivity spillovers from FDI occur exclusively for small firms. endogeneity problems (see. Also small foreign firms.. it is small foreign firms that seem to interact mostly with domestic firms and transfer new technology. Policy suggestions to host countries should stress that in small open economies at an advanced development stage like Greece. being probably not as selfsufficient as their large counterparts.g. Hence. Appropriation of technology know-how by local agents looks then more feasible.

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3 80.5 27.3 94.2 28.7 18. clothing.4 77.3 95.0 97.8 66.3 83.3 80.0% Industrial sectors All firms Domestic Number % 830 173 664 130 329 416 20 213 137 94 383 146 3535 94.0 24. 1997 Large Firms Domestic Foreign Number % Number % 270 47 192 10 89 94 8 53 36 27 69 21 916 32.3 62.0 2.5% 1 2 3 4 5 6 7 8 9 10 11 12 Food.4 3.9 9.9% 33 41 14 4 12 8 3 9 10 2 10 3 149 67. tobacco Chemicals Textiles.7 16.0 96.0 75.8 96.0 14.7 33.0 4.4 93.1 90.2 97.0 72.3 28.9 6.9 7. printing & publishing Oil refineries & coal Plastic & rubber Electric machinery Transport equipment Non-metallic minerals Other Total 879 224 679 135 344 432 24 224 152 100 399 150 3742 .beverage.9 26.2 3.8 2.7 4.4 25. leather Machinery equipment Basic metals Wood.5 75.6 40. paper.0 50.5% Foerign Number % 49 51 15 5 15 16 4 11 15 6 16 4 207 5.3 95.20 Table 1: Industry and size distribution of domestic and foreign firms in Greece.7 27.7 5.1 22.0 81.1 94.6 96.7 4.6 22.0 80.

2395 590 6935 1878 580 5592 11222 1022 15192 13303 1163 16752 8719 914 12942 .970 37.426 48.774 51.920 31.029 52.071 24.793 50.898 25. Greece 1997 Number of Firms Sample Total Small Large All 3742 2677 1065 Domestic 3535 2619 916 Foreign 207 58 149 Majority 113 25 88 Minority 94 33 61 Y/L (mean values*) Total Small Large 26.074 Total Assets (mean values*) Total Small Large * In million drachmas.047 29.565 45.252 27.183 25.224 25.363 42. productivity and total assets of domestic and foreign firms.21 Table 2: Number.

782 (0.00) 0.00) 1. while large firms employ more than 50 persons.435 -3523.391 -2597.00) 0.076 (0.21) 0.05 are required. the inclusion of which was based on the F-statistic.070 (0.468 (0.00) 0.00) 0.435 -3524.058 (0. 3742 2677 1065 Notes: 1.00) 0.084 (0.265 (0.234 0.639 -759.793 (0.64) 0.00) -0. Small firms employ ≤50 persons.062 (0.026 (0.771 (0.00) 0.00) 1.219 (0.00) 0.00) 0.466 (0.681 (0. The excluded dummy corresponds to the last category of miscellaneous manufacturing industries.77 Dependent variable: ln(Y/L) of all firms Small 3 4.00) 0. All regressions were performed with 19 two-digit industry dummies.094 (0.00) 0.234 (0.67 5 4.293 (0.087 (0.084 (0.754 (0.904 (0. .00) 0.076 (0. For statistically significant parameter estimates.369 (0.22 Table 3: Productivity and foreign ownership: direct effects Independent variables C lnKL FDI FMAJ FMIN SCALE DEBT LIQ 1 5.266 (0.00) 0.160 (0.00) 0.00) 0.00) 0.105 (0.261 (0.28 Large 6 4.316 (0.093 (0.904 (0. 2.00) 0.13) 0.40 All firms 2 5.391 -2598.369 (0.00) 0.262 (0.061 (0.665 (0.00) 0.088 (0.68) 0.00) 0.00) 0.00) 0.00) 0.00) 0.082 (0.00) 0.00) 0.108 (0.12 R2 Log-likelihood Obs.639 -759.00) 0.Numbers in parentheses are the p-values. values of p ≤ 0.00) 0.00) 1.00) 1. 3.88 4 4.00) 0.228 (0.56) -0.

00) 0.664 (0.801 (0.22) 0.397 -2450.00) (0.84) 0.914 (0.00) 0.00) -0.00) 0.385 (0.090 (0.749 (0.00) 0.088 (0.475 0.00) 0.089 (0.00) 1.145 (0.082 (0.488 (0.147 (0.211 (0.473 (0.816 (0.024 (0.265 0.317 (0.924 (0.397 0.00) (0.00) 0.00) 0.00) 0.224 (0.09) 1.089 (0.086 (0.00) 0.944 (0.00) -0.00) 0.363 (0.84) -0.743 (0.439 -3353.00) 1.73 3742 3 5.00) 0.00) 0.00) 0.00) 0.00) (0.218 (0.270 (0.00) (0.06 2677 -2450.03 5 4.00) 1.140 (0. .327 (0.00) 0.110 (0. $# Notes: See Table 3.526) 1.087 (0.380 (0.268 1.967 (0.00) 0.00) (0.40) 1.00) 0.509 (0.087 (0.21 1065 -738.18) 1.641 -738.80) -0.23 Table 4: Productivity and foreign ownership: direct and spillover effects Independent variables C KL FDI FMAJ FMIN FK FKMAJ FKMIN SCALE DEBT LIQ Dependent variable: ln(Y/L) of all firms ALL 1 5.02 2 5.243 0.089 (0.00) 0.00) -0.09 12 4.40 SMALL 6 7 4.318 (0.301 (0.00) 0.439 -3354.181 (0.00) 0.078 (0.00) 1.00) 0.104 0.79) 0.089 (0.914 (0.087 (0.00) 0.439 -3355.00) 0.477 (0.640 0.00) 0.55) -0.01) 0.888 (0.00) 0.914 0.00) 0.397 -2451.00) (0.243 (0.00) 0.385 (0.01) 0.00) 0.090 (0.086 0.893 (0.475 (0.70) 0.102 (0.090 (0.796 (0.00) 0.915 (0.22 LARGE 10 11 4.07) 1.477 (0.082 (0.00) (0.649 -738.385 (0.00) 0.08 LogLikelihood Obs.00) 0.659 (0.104 (0.41 8 4.011 (0.00) 1.47) -0.61) 0.00) 0.063 (0.49) 0.22) -0.00) 0.39 4 5.004 (0.640 -738.025 (0.00) 0.00) 0.00) (0.00) 1.265 (0.090 (0.500 (0.24) -0.00) (0.00) 0.00) 0.00) 0.102 (0.397 -2451.266 (0.064 (0.97) 0.086 (0.088 (0.295 (0.439 -3353.02 9 4.00) 0.081 (0.00) 0.00) (0.304 4.00) 0.891 (0.269 (0.00) 0.088 (0.191 (0.243 (0.00) 0.00) 0.00) 0.088 (0.269 (0.063 0.063 (0.267 (0.385 (0.38) 1.064 (0.345 (0.813 4.00) 0.00) 0.00) 0.00) 0.00) 0.217 (0.243 (0.00) 1.71) 0.00) 0.00) 0.00) 0.00) 0.

80) 1.468 (0.392 -2386.00) 1.054 (0.882 (0.07) 1.09 2619 SMALL 4 4.00) 1.087 (0.00) 0.661 (0.89 3 4.87) 0.851 (0.091 (0.01) 0.376 (0.237 (0. .671 (0.00) 0.084 (0.050 (0.00) 0.00) 1.01) 0.234 (0.00) 0.22) 0.594 -634.00) 0.00) 0.00) 0.22 (0.00) 0.236 (0.00) 0.178 (0.082 (0.087 (0.882 (0.32) -0.00) 0.00) -0.00) 0.88 5 5.090 (0.00) 1.594 -634.778 (0. Notes: See Table 3.269 (0.392 -2387.00) 0.406 -3178.780 (0.272 (0.00) 0.375 (0.00) 0.85 916 LARGE 6 5.00) 0.323 (0.121 (0.088 (0.02) 1.056 (0.00) 0.032 (0.00) 0.00) 0.00) 1.375 (0.406 -3180.38 3535 2 5.463 (0.00) 0.050 (0.00) 0.00) 0.24 Table 5: Productivity and foreign ownership: spillover effects on domestic firms Dependent variable: ln(Y/L) of domestic firms ALL 1 5.00) 0.238 (0.00) -0.089 (0.68 Independent variables C KL FK FKMAJ FKMIN SCALE DEBT LIQ R2 Loglikelihood Obs.464 (0.117 (0.00) 0.422 (0.269 (0.00) 0.

392 -2386.00) 0.106 (0. $# 1.77 1065 5.375 (0.00) 0.384 (0.220 (0.089 (0.00) 0.267 (0.236 (0.915 (0.00) 0.00) 1.862 (0.00) 0.244 (0.00) 0.475 (0.084 (0.00) 1.00) 0.289 (0.03 2677 .00) 0.089 (0.243 (0.00) 1.062 (0.00) 0.406 -3180.205 (0.093 (0.00) 0.089 (0.00) 0.00) 0.00) 0.00) 0.222 (0.946 (0.188 (0.088 (0.844 (0.11 (0.204 (0.00) 1.891 (0.00) 0.087 (0.00) 0.00) 0.00) 0.708 (0.00) 0.18 3535 5 4.01 3742 3 5.00) 0.242 (0.076 (0.12) 0.439 -3355.086 (0.00) 0.251 (0.253 (0.77) -0.00) 1.61) - ALL 7 4.311 (0.00) 0.00) 0.676 (0.594 -634.207 (0.086 (0.371 (0.721 (0.860 (0.00) 0.31 916 Log-Likelihood Obs.00) 0.087 (0.273 (0.00) 0.00) 0.00) 0.090 (0.03) 0.00) 0.435 -3524.266 (0.273 (0.059 (0.056 (0.385 (0.00) 0.49) 0.914 (0.00) 0.631 (0.523 (0.00) 1.00) 0.12) 0.090 (0.00) 0.00) 1.53) -0.61 2619 4.641 -737.218 (0.00) 0.00) 1.00) 0.00) 0.396 -2451.048 (0.088 (0.081 (0.25 Table 6: Productivity and foreign firm size: direct and spillover effects Dependent variable: ln(Y/L) Independent Variables 1 C KL FDI FDISM FDILG FK FKSM FKLG SCALE DEBT LIQ 5.00) 1.32 ALL DOMESTIC ALL SMALL DOMESTIC 6 LARGE DOMESTIC 8 2 5.12) 0.438 -3354.00) 1.00) 0.00) 0.89 4 5.093 (0.370 (0.00) 0. Notes: See Table 3.00) 0.215 (0.00) 0.11) 0.00) 1.463 (0.

819 2. P-values (not reported) are ≤ 0. 2.402* 1.301 0.267* 0. FKMAJ/FKMIN) from FDI are reported for simplicity.386 0.431* Notes: 1.382 0.05.05 the coefficient is denoted by an asterisk. but only the coefficients of efficiency shifts (FDI.454 0.193* 0. Number of observations is 2390.456 Dependent Variable: In (Y/L) of all firms SMALL LARGE 2 3 4 5 6 0.141* 0. The estimations were run including all independent variables appearing in Table 4. .375 0.336* 0.259* 0. 3.435* 0. When > 0.091 1.526* 0. FMAJ/FMIN) and spillovers (FK.26 Table 7: IV estimates corresponding to Table 4 Independent variables FDI FMAJ FMIN FK FKMAJ FKMIN ALL 1 0.326* 0.

401 Dependent Variable: in (Y/L) DOMESTIC SMALL ALL DOMESTIC 4 5 6 0.427 LARGE DOMESTIC 8 3.278 2.349 ALL 2 0. 3. When > 0. 2.05.291 4.337* 0. P-values (not reported) are ≤ 0. .429 3 0.743 0.427 ALL 7 0.112 0.335* 0. The estimations were run including all independent variables appearing in Table 4.368* 0.365* 1. Number of observations is 2390.214 0.27 Table 8: IV estimates corresponding to Table 6 Independent Variables 1 FDI FDISM FDILG FK FKSM FKLG Notes: 0.05 the coefficient is denoted by an asterisk. FKSM/FKLG) from FDI are reported for simplicity.248 0.763 0. but only the coefficients of efficiency shifts (FDI.571* 1.710 0. FDISM/FDILG) and spillovers (FK.306 3.278 0.045 0.

The special question addressed in this study is related to how differentiated such effects are depending on size and degree of (foreign) ownership.742 manufacturing firms operating in Greece in 1997.28 Abstract: Foreign direct investment is thought to contribute to host economies by increasing their efficiency either directly or through technology diffusion. it is found that. Policy recommendations follow. Such efficiency benefits are neither equally produced by foreign firms nor equally distributed to all domestic firms. Based on a sample of 3. majority-held foreign firms that exhibit higher productivity. O30. spillovers are important for small domestic firms and stem mostly from small joint ventures where the foreign partner owns a minor part of equity. while it is large. JEL no: F23. .

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