Tough Love: Do Czech Suppliers Learn from Their Relationships with Multinationals?

Many countries strive to attract foreign direct investment (FDI) hoping that knowledge brought by multinationals will spill over to domestic industries and increase their productivity. While the empirical studies have cast doubt on the existence of horizontal spillovers from FDI in developing countries, several recent papers have confirmed the presence of vertical spillovers, which take place through contacts between foreign affiliates and their local suppliers. However, the existing studies rely on industry-level proxies for vertical spillovers rather than information on actual relationships between local companies and multinationals. This study goes one step further by employing a unique dataset from the Czech Republic, which allows us to identify local firms supplying multinationals operating in the country. The data suggest that suppliers are different from other firms. They are larger, have a higher capital-labor ratio, pay higher wages and exhibit a higher productivity level. The evidence is suggestive of both high productivity firms having a higher probability of supplying multinationals as well as suppliers learning from their relationships with multinationals.foreign direct investment, technological spillovers, suppliers

Liquidity Constraints and Linkages with Multinationals

Using a unique data set from the Czech Republic for 1994-2003, this study examines the relationship between a firm’s liquidity constraints and its supply linkages with multinational corporations (MNCs). The empirical analysis indicates that Czech firms supplying MNCs are less credit constrained than non-suppliers. A closer inspection of the timing of the effect, however, suggests that this result is due to less constrained firms self-selecting into becoming MNC suppliers rather than the benefits derived from the supplying relationship. As recent literature finds that productivity spillovers from foreign direct investment (FDI) are most likely to take place through contacts between MNCs and their local suppliers, our finding suggests that well-developed financial markets may be needed in order to take full advantage of the benefits associated with FDI inflows.foreign direct investment, cash flow, liquidity constraints

The EU Factor and Slovak International Integration: the Role of Foreign Direct Investment

While the impact of EU conditionalities associated with recent EU-accession negotiations has been widely discussed, little attention has been given to the effect of post-1998 EU reforms on Slovakia's greater integration with the global economy. The convergence of Slovakia's institutions and policies with the EU's acquis communautaire has led to a dramatic increase in inflows of foreign direct investment into Slovakia in 2000/02. The available information suggests that the entry of foreign firms has been beneficial in inserting the Slovak economy firmly into the pan-European division of labor and raising the productivity of domestic firms.Europeanization; regional integration; foreign direct investment; spillovers

Vertical spillovers from multinational enterprises: Does technological gap matter?

Foreign direct investment (FDI) from Multinational enterprises (MNEs) can augment the productivity of domestic firms insofar as knowledge “spills over” from foreign investors to local producers. The capacity of local companies to exploit knowledge from MNEs can be affected by the technology gap between foreign and local enterprises at both horizontal (in the same industry) and vertical (in different industries) level. Whereas most of the empirical literature has focused exclusively on the analysis of horizontal and backward spillovers (i.e. between MNEs and local suppliers), the present paper also examines the relationship between FDI-related spillovers and technological gap in the Italian manufacturing sector at forward level (i.e. between MNEs and local buyers). Results suggest that at both intra-industry and forward level, the technological gap is of considerable importance for the spillover effect, particularly in the case of low-medium gap

Migrant Networks and Foreign Direct Investment

While there exists a sizeable literature documenting the importance of ethnic networks for international trade, little attention has been devoted to studying the effects of networks on foreign direct investment (FDI). The existence of ethnic networks may positively affect FDI by promoting information flows across international borders and by serving as a contract enforcement mechanism. This paper investigates the link between the presence of migrants in the US and US FDI in the migrants’ countries of origin, taking into account the potential endogeneity concerns. The results suggest that US FDI abroad is positively correlated with the presence of migrants from the host country. The data further indicate that the relationship between FDI and migration is driven by the presence of migrants with college education.migration, foreign direct investment, ethnic networks

Liquidity constraints and linkages with multinationals

Using a unique data set from the Czech Republic for 1994-2003, this study examines the relationship between a firm's liquidity constraints and its supply linkages with multinational corporations (MNCs). The empirical analysis indicates that Czech firms supplying MNCs are less credit constrained than non-suppliers. A closer inspection of the timing of the effect, however, suggests that this result is due to less constrained firms self-selecting into becoming MNC suppliers rather than the benefits derived from the supplying relationship. As recent literature finds that productivity spillovers from foreign direct investment (FDI) are most likely to take place through contacts between MNCs and their local suppliers, our finding suggests that well-developed financial markets may be needed in order to take full advantage of the benefits associated with FDI inflows. --foreign direct investment,cash flow,liquidity constraints

Foreign Manufacturing Multinationals and the Transformation of the Chinese Economy: New Measurements, New Perspectives

What is the relationship between foreign manufacturing multinational corporations (MNCs) and the expansion of indigenous technological and managerial technological capabilities among Chinese firms? China has been remarkably successful in designing industrial policies, joint venture requirements, and technology transfer pressures to use FDI to create indigenous national champions in a handful of prominent sectors: high speed rail transport, information technology, auto assembly, and an emerging civil aviation sector. But what is striking in the aggregate data is how relatively thin the layer of horizontal and vertical spillovers from foreign manufacturing multinationals to indigenous Chinese firms has proven to be. Despite the large size of manufacturing FDI inflows, the impact of multinational corporate investment in China has been largely confined to building plants that incorporate capital, technology, and managerial expertise controlled by the foreigner. As the skill-intensity of exports increases, the percentage of the value of the final product that derives from imported components rises sharply. China has remained a low value-added assembler of more sophisticated inputs imported from abroad--a “workbench” economy. Where do the gains from FDI in China end up? While manufacturing MNCs may build plants in China, the largest impact from deployment of worldwide earnings is to bolster production, employment, R&D, and local purchases in their home markets. For the United States the most recent data show that US-headquartered MNCs have 70 percent of their operations, make 89 percent of their purchases, spend 87 percent of their R&D dollars, and locate more than half of their workforce within the US economy--this is where most of the earnings from FDI in China are delivered.Foreign Direct Investment, International Investment, China, Multinational Corporations, Exports

Do the biggest aisles serve a brighter future ? global retail chains and their implications for Romania

During the past two decades many economies have opened their retail sector to foreign direct investment, yet little is known about possible implications of such liberalization on the economies of developing host countries. Using firm-level data from Romania, this study examines how the presence of global retail chains affects firms in the supplying industries. Applying a difference-in-differences method, the econometric analyses yield the following conclusions. The expansion of global retail chains leads to a significant increase in the total factor productivity in the supplying industries. Their presence in a region increases the total factor productivity of firms in the supplying industries by 15.2 percent and doubling the number of chains leads to a 10.8 percent increase in total factor productivity. However, the expansion benefits larger firms the most and has a much smaller impact on small enterprises. This conclusion is robust to several extensions and specifications, including the instrumental variable approach. These results suggest that the opening of the retail sector to foreign direct investment may stimulate productivity growth in upstream manufacturing and extend our understanding of foreign direct investment in service sectors.Food&Beverage Industry,Markets and Market Access,E-Business,Economic Theory&Research,Access to Markets

A Touch of Sophistication: FDI and Unit Values of Exports

The debate on trade and growth increasingly focuses on the composition of exports. Exports of more “sophisticated” products appear to be positively correlated with growth, and upgrading the quality of exports is high on the policy agenda of many countries. This study presents evidence suggesting that attracting inflows of FDI offers potential for upgrading a country’s export basket. The empirical analysis relates unit values of exports measured at the 4-digit SITC level to data on sectors treated by investment promotion agencies as priority in their efforts to attract FDI. The sample covers 116 countries over the period 1984-2000. The findings are consistent with a positive effect of FDI on unit values of exports in developing countries. However, such a relationship is less evident in developed countries. These results suggest that FDI can help bridge gaps in production and marketing techniques between developing and high income economies.export quality, unit values, FDI, investment promotion, industrial policy