Beata Javorcik University of Oxford and CEPR

1. Can Eastern European experience teach us anything about development impacts of FDI in other parts of the world? Beata Javorcik University of Oxford and CEPR

2. Yes! Why? • Why the composition of FDI inflows differs from region to region, major multinationals are present on all continents • Differential impacts of FDI can be attributed to host country conditions rather than region-specific factors

3. Why should we expect technology transfer through FDI? • Theoretical literature • OLI paradigm (Dunning 1988) • Models with heterogenous firms (Helpman, Melitz and Yeaple, AER 2004) • MNCs are more likely to offer training to their employees • MNCs are responsible for most of the world’s R&D • 700 multinational corporations accounted for 46% of the world’s total R&D expenditure and 69% of the world’s business R&D in 2002 (UNCTAD, 2005) • R&D budgets of large multinationals may exceed R&D spending of some countries

4. R&D budgets of some MNCs exceed R&D spending of transition countries (2003) CIS figure includes: Russia, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Ukraine, Uzbekistan. New EU member states figure includes: Czech Rep, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Rep, Slovenia.

5. Productivity spillovers from FDI • Horizontal - from presence of multinationals (MNCs) in the same sector • demonstration effect, movement of labor • MNCs have an incentive to prevent them

6. Different channels are at work and relative magnitudes differ by country World Bank survey: Has the presence of foreign firms operating in your industry had any impact on your firm?

7. Productivity spillovers from FDI • Horizontal - from presence of multinationals (MNCs) in the same sector • demonstration effect, movement of labor • MNCs have an incentive to prevent them • Backward linkages - contacts between local suppliers and MNC customers • direct assistance to suppliers, higher requirements • MNCs have an incentive to promote them => more likely to observe spillovers through backward linkages rather than the horizontal channel

8. Broad patterns are similar across regions • No evidence of horizontal spillovers • Evidence consistent with spillovers through backward linkages • Lithuania (Javorcik, AER 2004) • Indonesia (Blalock and Gertler, JIE 2007)

9. Beneficial effects of services FDI • A one-standard-deviation increase in FDI in services => a 3.8% increase in the average productivity of Czechfirms in manufacturing • Services liberalization from the level of Romania to the level of the Czech Republic => a 4.8% increase in the average productivity of Czechfirms • Arnold et al (2007) • A one-standard-deviation increase in services liberalization => a productivity increase of 6% for Indian firms • Arnold et al (2008)

10. Bottom line • Diverse experiences of countries are a reflection of their policies and characteristics, not region-specific factors • Hence, Eastern European experience contain valuable lessons for Asian countries, and vice versa

11. Thank you

12. Foreign ownership improves performance (Indonesia: Arnold and Javorcik 2008)

13. Foreign ownership improves performance (Indonesia: Arnold and Javorcik 2008)

14. Acquisitions induce rapid changes

15. Acquisitions lead to higher investment

16. Acquisitions facilitate integration into global markets

17. What foreign owners do not change

18. How do we reconcile an increase in TFP with no change in capital- and skill-intensity? • TFP increase achieved through organizational and managerial changes • Attracting more experienced and motivated workers • Pay scales linked to performance • Foreign affiliates in Indonesia pay higher wages to workers with a given educational level than domestic producers (Lipsey and Sjöholm 2004) • Training of workers • Better inputs

19. Thank you

20. Mixed results from firm-level panel studies of FDI spillovers • Aitken and Harrison (AER 1999) - Venezuelan plant-level data 1976-1989 • Increase in FDI presence negatively affects TFP of local plants in the same sector • Haskel, Pereira and Slaughter (REStat 2007) - UK plant-level data 1973-1992 • Increase in FDI presence positively affects TFP of local plants in the same sector • Javorcik (AER 2004) - Lithuanian firm-level data 1996-2000 • Positive spillovers to supplying sectors, no evidence of intra-industry effects

22. Country conditions may matter • Aitken and Harrison (1999) – Venezuela 1976-1989 • Heavy restrictions on foreign investors, mandatory JVs, import substitution => low incentives for technology transfer to foreign affiliates (Moran 2007) • Increase in foreign equity => increase in TFP only in firms with under 50 employees => little potential for producing knowledge spillovers • Haskel, Pereira and Slaughter (2007) - UK 1973-1992 • Highly developed country => limitedpotential for ‘market stealing’ • Highly developed country => limited room to learn • Lesser performers benefit more from spillovers • Javorcik (2004) - Lithuania 1996-2000 • Transition from central planning to free market • Limited competition and exposure to foreign goods => ‘market stealing’ effect likely • Limited exposure to foreign buyers in the past => potential for spillovers from foreign customers