Does foreign investment improve technical efficiency of manufacturing: Evidence from the Republic of Serbia

Abstract

This paper offers significant evidence for the presence of a beneficial impact of foreign direct investment on technical efficiency based on a balanced panel data on a sample of 92 manufacturing groups over the period 2010-2019. Throughout this period Serbia lost 28% of the potential output of the manufacturing sector due to technical inefficiency. The finding is directly supported by the results at the level of the observed groups. Thus, the greatest increase in technical efficiency is in branches with a high share of foreign ownership, such as: production of motor vehicles, production of chemicals, and production of wire and cable equipment. The methodology is based on stochastic frontier analysis - within that, 'true' random effects model. The paper contributes to a better understanding of the possible consequences of foreign-invested enterprises on the domestic economy and, in particular, the performance of local businesses. As a result, it is helpful to policymakers in developing counties, where FDI is thought to have technological spillovers on native businesses.