Not all that glitters. The direct effects of privatization through foreign investment

Abstract

Although foreign subsidiaries usually perform better than the average of the hosting economies, empirical literature has also established that the selection effect is statistically significant. In this paper we attempt to evaluate its economic relevance, using a unique dataset of annual financial reports by all medium and large Polish enterprises over a period 1996-2007. We match firms privatized with the use of FDI to a control group of non-privatized state owned companies in order to disentangle the effect of self-selection and FDI entry. Evidence suggests that although FDI enters more frequently into companies who already participate in the international trading networks, roughly half of the export intensity differential may be attributed to the entry of FDI. On the other hand, selection effects seem to dominate as far as efficiency is concerned, while only towards the end of the sample the positive effect of FDI on profitability may be confirmed.privatization, transition, propensity score matching, firm-level analysis, Poland