A meta‐analysis of the indirect impact of foreign direct investment in old and new EU member states: Understanding productivity spillovers

• DOI: http://doi.org/10.1111/twec.12587
• Author: Maria Cipollina,Randolph Luca Bruno
• Date: 01 May 2018
• Published date: 01 May 2018

ORIGINAL ARTICLE

A meta-analysis of the indirect impact of foreign

direct investment in old and new EU member

states: Understanding productivity spillovers

Randolph Luca Bruno

1,2,3

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Maria Cipollina

4

1

University College London, London, UK

2

Rodolfo DeBenedetti Foundation, Milan, Italy

3

IZA-Bonn Institute of Labor, Bonn, Germany

4

Universit

a del Molise, Campobasso, Italy

1

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INTRODUCTION

Recent literature widely suggests that foreign direct investment (FDI) may have a favour able

impact on the host economy, directly or indirectly. In the former case, multinational corporations

(MNCs) bring new capital to the economy and thereby contribute directly, for example, by increas-

ing inputs into the production function of firms partially or fully owned by foreign shareholders.

In the latter, FDI might produce positive externalities—spillovers—towards domestic firms in the

host country by enhancing their productivity, ultimately leading to economic growth.

1

In recent

years, policymakers across many countries have decided to liberalise capital infl ow policies in

order to attract investment from foreign MNCs, seeking to stimulate growth on a wider scale, that

is for both foreign and domestically owned companies. As a consequence of this renewed interest

in FDI among scholars, policymakers, practitioners and businessmen, there seems to be an attempt

to lower entry barriers for MNCs and to offer incentive schemes (e.g., tax breaks, subsidies, co-

investments, crowding-in) in order to attract more and more FDI.

2

In other words, governments

increasingly recognise the importance of cultivating FDI given the mounting evidence of how

knowledge brought in by foreign investors could “spill over”into indigenous firms, upgrade their

technological capabilities, bolster skills in the local workforce and consequently increase the over-

all competitiveness of the host economies (World Bank Group, 2010). As a result, many countries

have been moving towards liberalisation, promotion and facilitation of investment. Indeed, in 2014

more than 80% of investment policy measures aimed to improve entry conditions and reduce

restrictions (UNCTAD, 2015).

From 2010 to 2014, global foreign direct investment rose sharply, after having dropped drastically

due to the global financial crisis. It is interesting to note that while historically, FDI had long been

1

For a survey, see Bruno and Falk (2012), European Competitiveness Report.

2

For example, the Executive Agency for Small and Medium-sized Enterprises (EASME, https://ec.europa.eu/easme/) has

financed research on “Towards a Foreign Direct Investment attractiveness scoreboard—study with a special focus on inter-

national investments and competitiveness to help improve the cross/intraborder supply chains in the EU”(2014/06), sig-

nalling the potential spillover benefits of FDI on SMEs too.

DOI: 10.1111/twec.12587

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©2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2018;41:1342–1377.

concentrated in advanced economies, which have acted as both senders and recipients, since the

2007–08 global financial crisis the contribution of developing countries to worldwide FDI has

become more and more pronounced. In fact, in 2012 the share of FDI inflows in developing coun-

tries became higher than the share in developed countries. Developed countries in Europe and else-

where experienced a drop in FDI inflows between 2010 and 2013, while transition economies saw a

relative increase from low levels and developing countries saw a stable trend in their overall high

figures (UNCTAD, 2013). However, in 2014 most major regional groupings and groups of econ-

omies engaged in regional integration initiatives experienced a fall in inflows. Geopolitical risk and

regional conflict weighed heavily on FDI flows towards the transition economies of south-east Eur-

ope, where in 2014 FDI fell by more than half from the previous year (UNCTAD, 2015).

Changes in global FDI trends and their macroeconomic impact have attracted substantial research.

There is an expanding literature on the relationship between FDI and economic performance

3

and a

quite substantial number of empirical studies on European countries, both for old (EU-15) and new

Member States (NMS; Havr

anek & Ir

sov

a, 2010, 2011; Iwasaki & Tokunaga, 2014, 2016; Meyer &

Sinani, 2009 and Toku naga & Iwasaki, 2017) . In particular, we would like to highlig ht three recent

meta-regression analyses by Iwasaki and Tokunaga focusing on transition countries, that is, the

“Macroeconomic Impact of FDI in transition economies”(IT 2014), “The Determinants of FDI in

Transition Economies”(TI 2017) and “Technology transfer and spillovers from FDI in transition

economies”(IT 2016). We regard these articles as comparable to our analysis as far as methodologi-

cal choices are concerned. However, we complement them in three different ways: first, we look at

micro (i.e., firm-to-firm) impact of FDI by exploiting firm-level estimates from the literature, whereas

IT 2014 focuses on macro cross-countries/panel or time series studies; second, we are interested in

the impact (FDI as independent variable), and not the determinants of FDI as in TI 2017; finally, we

have a similar research question of IT 2016, but we use a different sample of countries (only par-

tially overlapping), that is, all high-quality microstudies on European Union countries we could find

via a thorough selection (not only transition ones). In other words, this is the first meta-regression

analysis focusing on the comparison of old EU versus new Member States (i.e., a subset of former

transition economies), therefore touching upon both the comparative economics as well as the Euro-

pean Union literature. This is therefore a timely contribution in an era of increased challenges faced

by the whole EU compact, old EU and NMS alike.

Despite the theoretical rationale for positive FDI spillovers on host country productivity and

economic growth, empirical analyses have provided inconclusive or at least mixed evidence on the

growth/productivity enhancing effect of FDI.

4

Empirical literature is very large and diverse show-

ing different relationships (positive, negative or none). This is evidence that the impact is indeed

ambiguous (Clark et al., 2011; Rojec & Knell, 2017). The lack of robust empirical evidence is

partly due to relevant differences between studies in terms of data sets, sample sizes, model speci-

fication, precision of estimates, etc.

This paper provides a viable way of evaluating and combining the empirical results on the

economic impact of FDI observed in a group of studies, released between 2000 and 2015, on the

enlarged European Union (EU-15 vis-

a-vis NMS), and it measures the strength of the FDI-perfor-

mance relationship by drawing to firm-level econometric studies on the indirect impact of FDI on

3

Regarding the estimated coefficients of the impact of FDI, comprehensive surveys are provided by G€

org and Strobl (2001),

Meyer and Sinani (2009), Havr

anek and Ir

sov

a (2010, 2011, 2012), Hanousek, Kocenda, and Maurel (2011), Ir

sov

a&

Havr

anek (2013). More recently, Iwasaki and Tokunaga (2014, 2016) and Tokunaga and Iwasaki (2017).

4

For a comprehensive survey of literature, see De Mello (1997), Clark, Highfill, Campino, and Rehman (2011) and Rojec

and Knell (2017).

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economic performance.

5

Given the considerable number of empirical studies dealing with this sub-

ject matter, we have limited our review as follows:

1. first, we concentrate on the indirect impacts of FDI on host countries; therefore, we disregard

all other possible direct impacts on the host country’s productivity and growth, that is, the

direct accumulation of capital in the affiliates companies;

2. second, we take into account studies based on firm-level data sources only: while rapid growth

and high ratios of inward FDI to GDP tend to be witnessed together, causality mechanisms are

not easily discernible through aggregate cross-country analysis because FDI is often associated

with other growth-promoting factors, such as the investment to GDP ratio and the degree of

openness of the economy.

6

We posit that studies using data at firm level take into account

potential heterogeneity in the effect of FDI on growth depending on firm-specific characteristics

and better evaluate the channels through which FDI may influence economic growth;

3. third, we focus on the EU, given the recent surge in FDI, and the political and economic

resources devoted by EU governments to remove the lingering restrictions, both explicit and

implicit, to foreign investment (World Bank Group, 2010). This paper will shed some light on

the economic impact of FDI in Europe, which remains one of the main recipients of FDI in the

advanced economic world (UNCTAD, 2013);

4. finally, by taking advantage of the large number of high-quality firm-level studies on FDI and

firm performance in Europe, we explain these findings by looking at the heterogeneous impact

of FDI on growth in each and every country, which are affected by FDI positively, negatively

or not significantly.

Our sample is composed of 52 quantitative studies providing 1,133 point estimates measuring

the strength of the FDI–performance relationship. The countries analysed in the selected sample

are as follows: Belgium, Bulgaria, Czech Republic, Estonia, France, Greece, Hungary, Ireland,

Italy, Lithuania, Poland, Portugal, Romania, Spain, Sweden and the UK. Five studies included in

the MRA cover a group of countries instead of a single nation, namely: (i) the Baltic countries;

(ii) Bulgaria, Poland and Romania; (iii) central Europe; (iv) central and eastern Europe (CEE), Tur-

key and the Commonwealth of Independent States (CIS); and (v) the 15 EU members.

Table 1 shows the whole reference list for the MRA papers and mean values of the estimated

coefficients of the indirect effect of FDI on the performance of domestic firms. The overall average

of the indirect effect is 0.623 with large differences across countries.

Despite a large number of theoretical models highlighting the channels through which FDI can

enhance productivity, results summarised in Table 1 show how the empirical evidence on EU has

so far failed to provide clear-cut evidence. There is weak evidence that FDI generates positive

impacts for host countries: about two-thirds of point estimates are negative and around half of pos-

itive results refer to very low impact (below to 0.1).

Considering the EU-15 as a whole, Lesher and Miroudot (2008) find a negative impact (mean

value—0.76) of FDI on the operating revenue. The EU member that collects more negative results is

the UK, in which FDI appear to affect negatively TFP and output growth (Driffield & Love, 2005;

Driffield, Love, & Taylor, 2009; Girma, G€

org, & Pisu, 2007; Girma & Wakelin, 2000; McVicar,

2002). Castellani and Zanfei (2003) also find a negative impact on output growth of FDI in France,

5

There is already a broad consensus on the existence of a positive relationship between the direct impact of FDI (e.g., capi-

tal accumulation) and growth, but the literature understanding of the indirect impact is much less clear.

6

For a meta-regression analysis (MRA) on macroeconomic studies, see Iwasaki & Tokunaga (2014).

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