FDI Impact Analysis: A Survey of Results and Methodologies of Studies on Transition Economies Felix Eschenbach, OECD I

1. FDI Impact Analysis: A Survey of Results and Methodologies of Studies on Transition EconomiesFelix Eschenbach, OECD Investment Compact Zagreb October 30/31 2006

2. FDI Impact Analysis A comparative analysis of different approaches Presented at the OECD Investment Compact for South East Europe Workshop in Zagreb, 30-31 October 2006 Title of the Workshop: Evaluating the Impact of Foreign Direct Investment in SEE - Case Studies and Practical Tools

3. Structure of the Presentation I. What is the objective of the analysis ? II. Summary and evaluation of main methodological criteria III. Case studies IV. Cross-country studies V. Summary of findings VI. Final remarks VII. Bibliography

4. I. What is the objective of the analysis ? There are changes in paradigms: FDI has long been considered as a means of seizing control of a foreign economy by multinationals, now the view has changed and FDI is expected to be always good for the host economy FDI impact analysis asks the question whether this is true. In addition it tries to quantify the impact of FDI on a number of different variables On top of that it may help to maximize the benefits from FDI if we understand the mechanisms at work It uses different methodological approaches to generate more robust and reliable results We show findings for a number of countries and highlight methodological criteria The methodology criteria are important for various reasons (next slide)

5. II. Summary and Evaluation of Main Methodological Criteria

11. III. Case Studies

12. Bessonova, Kozlov, Yudaeva (2002), Trade Liberalization, Foreign Direct Investment, and Productivity of Russian Firms Kaminski/Smarzynska (2001), Foreign Direct Investment and Integration into Global Production and Distribution Networks The Case of Poland Wisniewski (2005), The Impact of Foreign Direct Investment on Regional Development in Poland OECD (2000), Lithuania: Foreign Direct Investment Impact and Policy Analysis Smarzynska (2002), Does Foreign Direct Investment increase the Productivity of Domestic Firms ? In Search of Spillovers through Backward Linkages

13. Study: Smarzynska (2002), Lithuania Objective: Assessment of productivity spillovers through backward linkages Main findings: There are spillovers from FDI taking place through backward linkages, i.e. local suppliers, there is no indication of spillovers in the same industry, the spillovers are larger in domestic-market rather than in export-oriented foreign companies and are not geographically restricted, full or partial foreign ownership is not found to matter Sectors: Manufacturing Sub-sectors: 15 Type of assessment: quantitative, econometric (panel), controlling for other influences Type of FDI: totally or partially foreign owned enterprises, stocks Period: 1996-2000 Database: firm-level Data source: Lithuanian Statistical Office

14. Study: OECD (2000), Lithuania Objective: Assess impact of FDI on the capital account, financial sector development, privatisation, spillover effects Main findings: FDI has become increasingly important as a source of financing the current account deficit, FDI has increased the efficiency of the banking sector and has helped formulate relevant legislation in the area, there is evidence for spillovers through backward linkages with local suppliers Sectors: All Sub-sectors: Financial Sector Type of assessment: quantitative, non-econometric, not controlling for other influences, Type of FDI: aggregate, BoP definition, inflows Period: 1990s Database: macro-level (balance of payments), survey data Data source: Bank of Lithuania

18. IV. Cross-Country Studies 

19. Broadman et al. (2006): Linkages between Foreign Direct Investment and Trade Flows, in: From Disintegration to Reintegration, World Bank Campos, Kinoshita (2002): Foreign Direct Investment as Technology Transferred: Some Panel Evidence From the Transition Economies Damijan, Majcen, Rojec, Knell (2001): The Role of FDI, R&D Accumulation and Trade in Transferring Technology to Transition Countries: Evidence from Firm Panel Data for Eight Transition Countries Hunya/Geishecker (2005): Employment Effects of Foreign Direct Investment in Central and Eastern Europe UNECE (2001): Economic Growth and Foreign Direct Investment in the Transition Economies, Chapter 5, Economic Survey of Europe 2001 No. 1

25. V. Summary of Findings (Croatian Studies Included)

26. Note on Spillover effects Vertical spillover effects (through backward or forward linkages): (i) direct knowledge transfer from foreign customers to local suppliers (ii) higher requirements regarding product quality and on-time delivery introduced by multinationals (iii) indirect knowledge transfer through movement of labour (iv) increased demand for intermediate inputs due to multinational entry which allows local suppliers to to reap the benefits of scale economies (v) increased competition in the intermediate products market Horizontal spillover effects Demonstration effect, learning about technologies and marketing techniques through observation of multinationals Movement of labor from multinationals to domestic enterprises

27. VI. Final Remarks The impact of FDI may be assessed using a large number of different target variables (dimensions) The studies analyzed find a positive impact of FDI on most of the target variables Examples of no or an even negative impact of FDI on the target variables include that FDI does not seem to generate horizontal (intraindustry) productivity spillovers, may deepen regional disparities in economic development, have an ambiguous impact on the trade balance or on fiscal revenues Striking is the evidence found for vertical knowledge spillovers vs. no or even negative evidence for horizontal spillover effects, so foreign firms protect their knowledge well and/or domestic firms are unable to absorb it. There are also differences between long-run and short-run effects, such as on employment (negative in the short and positive in the long run) Therefore a careful FDI impact analysis is needed to implement an appropriate policy framework

28. VIII. Bibliography Bessonova, Evgenia, Kozlov, Konstantin, Yudaeva, Ksenia (2002), Trade Liberalization, Foreign Direct Investment, and Productivity of Russian Firms Broadman, Harry et al. (2006): Linkages between Foreign Direct Investment and Trade Flows, in: From Disintegration to Reintegration, World Bank Campos, Nauro F., Kinoshita, Yuko (2002): Foreign Direct Investment as Technology Transferred: Some Panel Evidence From the Transition Economies, CEPR Discussion Paper No. 3417 Damijan, Joze P., Majcen, Boris, Rojec, Matija, Knell, Mark (2001): The Role of FDI, R&D Accumulation and Trade in Transferring Technology to Transition Countries: Evidence from Firm Panel Data for Eight Transition Countries, Institute for Economic Research Working Paper No. 10 Hunya, Gabor, Geishecker, Ingo (2005): Employment Effects of Foreign Direct Investment in Central and Eastern Europe, wiiw Research Reports 321 OECD (2000), Lithuania: Foreign Direct Investment Impact and Policy Analysis, Working Papers on International Investment Number 2000/3 Kaminski, Bartlomiei, Smarzynska, Beata (2001), Foreign Direct Investment and Integration into Global Production and Distribution Networks The Case of Poland, World Bank Policy Research Working Paper 2646 Smarzynska, Beata (2002), Does Foreign Direct Investment increase the Productivity of Domestic Firms ? In Search of Spillovers through Backward Linkages, World Bank Policy Research Working Paper 2923 UNECE (2001): Economic Growth and Foreign Direct Investment in the Transition Economies, Chapter 5, Economic Survey of Europe 2001 No. 1 Wisniewski, Anna (2005), The Impact of Foreign Direct Investment on Regional Development in Poland, Institute for World Economics, Hungarian Academy of Sciences Working Paper No. 162