HOME VERSUS HOST COUNTRY EFFECTS OF FDI: SEARCHING FOR NEW EVIDENCE OF PRODUCTIVITY SPILLOVERS* Priit Vahter, Jaan Masso December 2005 Working Papers of Eesti Pank No 13, 2005

The aim of this paper is to study the effects of both inward and outward foreign direct investment (FDI) on productivity. The main novelty is the analysis of the spillover effects of outward FDI that may occur outside the investing firms on the rest of the home country. The effects are addressed both for the manufacturing and services sectors. To our best knowledge there have so far been no studies based on enterprise-level panel data analysing the spillovers of outward FDI in the production function estimation framework. We find that engaging in outward FDI or receiving inward FDI is positively related to the productivity of the parent firm in Estonia or the subsidiary in Estonia. We do not find much evidence of positive spillovers via outward or inward FDI that is robust to the specification of the model or does not depend on the sector being studied. The results on spillover effects vary according to different specifications of the spillover variable, sector or the model, being either statistically insignificant or, in some cases, positive.
JEL Code: F10, F21, F23
Key words: foreign direct investment, spillovers, home country effects, productivity

* The authors are grateful for valuable comments and suggestions by all seminar participants from the Research Department and the Economics Department of Eesti Pank, Holger Görg, Urmas Varblane, Harald Lehmann, Kalev Kaarna and participants of seminars held in Halle (Germany) and Kääriku (Estonia). We thank Piret Anton from the Balance of Payments Department of Eesti Pank for substantial help with data on outward and inward FDI in Estonia. Jaan Masso acknowledges also financial support from the Ministry of Education and Research of the Republic of Estonia - for the target financed project No 0182588s03.

Authors' e-mail addresses: Priit.Vahter@epbe.ee, Jaan.Masso@mtk.ut.ee

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction

2. Home and Host Country Effects of FDI

3. Methodology

4. Estonian Outward and Inward FDI

5. Data and Descriptive Statistics

6. Econometric Analysis of the Effects of FDI on Total Factor Productivity

7. Conclusions

References

Appendices

Appendix 1. Vertical Spillovers

Appendix 2. Correlation matrix of the variables

Home versus Host Country Effects of FDI: Searching for New Evidence of Productivity Spillovers, Working Papers of Eesti Pank No 13, 2005 (PDF*)

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