Empirical evidence

Abstract

The views stated in this thesis are those of the author and not necessarily those of the supervisor, second assessor, Erasmus School of Economics or Erasmus University Rotterdam. Abstract Numerous countries strive to attract foreign direct investment (FDI) hoping for productivity to spill over from multinationals to domestic firms. This paper studies the possible productivity spillovers from FDI for domestic firms, through contact with foreign-owned firms in horizontal, downstream and upstream industry sectors. The analysis uses a large panel of Estonian manufacturing firms for the period 2010 to 2018 and implements a fixed effects methodology. The study shows that domestic firms experience positive FDI productivity spillovers through backward and forward linkages with multinationals in downstream and upstream sectors. Contrastively, local firms do not experience significant productivity spillovers from FDI through contact with foreign-owned firms in horizontal sectors. Such findings can be implemented by policy makers for the evaluation of policies directed at attracting foreign funds. domestic firms and industries. Policy makers may use such findings to develop cost-benefit analyses concerning policies directed at attracting foreign funds. They may also be used as the theoretical backbone for the development of policies that facilitate the creation of business linkages between domestic and multinational firms. The results from this research could be built on by using data that describe individual firms as purchasers or suppliers to multinationals, instead of using sectoral data to generate input-output proportions. It would also be interesting to learn about investor and domestic firms’ characteristics that dictate the size of spillovers and the channels through which they appear. Moreover, studying the effect of host country policies and characteristics on the inflows of FDI into certain sectors, would also be of interest.