Institutional proximity and the size and geography of foreign direct investment spillovers: Do European firms generate more favourable productivity spillovers in the European Union neighbourhood?

Abstract

The European Union (EU) association framework provides European businesses with an entry advantage into the associated countries by facilitating production links and encouraging institutional convergence. It is believed that this has multiple beneficial effects for the associated countries, including ones related to productivity spillovers accruing to domestic firms. However, no empirical evidence exists to show that the presence of European firms produces larger productivity spillovers in recipient economies compared to firms from other world regions. We examine this question using firm-level data covering 28 transition countries over the period 2002-2009. We estimate the intra-industry productivity effects of foreign ownership and examine how these differ across regional blocks (Central and Eastern Europe, South East Europe and European Neighbourhood Policy), by origin of investor (EU15 versus non-EU15), across geographical scales (national versus regional) and for different types of locations (capital-city regions versus the rest). Our results suggest that investments of EU origin play a distinctive role, helping raise domestic productivity in the associated countries unlike investments from outside the EU. However, this process operates in a spatially selective manner, potentially enhancing regional disparities and spatial imbalances. This assigns a particular responsibility for EU policy to devise interventions that will help redress these problems within its existing association framework.

The European Union and its neighboring countries: The economic geography of trade, Foreign Direct Investment and development

“…In addition the positive impact of EU FDI is largely concentrated in the most advanced 'core' regions of the host countries, with potentially adverse effects on regional imbalances. Overall, the evidence produced by Monastiriotis and Borrell (2016) confirms that increased institutional proximity can enhance the benefits from foreign investment in the ENP but also sheds light on the importance of dedicated regional development policies as part of the broader set of EU policy tools in the area. Closer economic integration with the EU might deliver spatially asymmetric benefits unless appropriate policies are put in place in order to foster absorptive capacity in peripheral areas and promote regional development.…”

“…Having explored the drivers of FDI location choices in the ENP countries, the assessment of the impact of these investments in the destination economies remains key to the analysis of the process of integration with the EU. Monastiriotis and Borrell (2016) address this question by looking at the productivity spillovers from foreign investment into domestic firms in a set of transition economies comprising Central and Eastern European Countries, the Balkans South Eastern Europe (SEE) and the ENP countries. In particular, Monastiriotis and Borrell (2016) explore the role of institutional proximity in shaping the impact of FDI.…”

“…Monastiriotis and Borrell (2016) address this question by looking at the productivity spillovers from foreign investment into domestic firms in a set of transition economies comprising Central and Eastern European Countries, the Balkans South Eastern Europe (SEE) and the ENP countries. In particular, Monastiriotis and Borrell (2016) explore the role of institutional proximity in shaping the impact of FDI. Their micro-level analysis shows that the concentration of European-owned firms leads to greater productivity spillovers when compared to FDI from other origins.…”

Foreign direct investment and growth: Can different regional identities shape the returns to foreign capital investments?

“…Unlike non-EU firms, EU-originating firms operate in similar institutional settings and share several norms and regulations with other European firms though located in another EU country. This ‘institutional convergence’ (Monastiriotis, 2016) makes it easier and less costly for intra-EU foreign firms and the local firms to interact each other. This creates a greater scope for positive spillovers.…”

“…As regards Europe, the existing works concentrate on specific countries or groups of them, mainly located in Central and Eastern Europe. See, for example, Driffield (2006), Girma and Wakelin (2007), and more recently Casi and Resmini (2012), Monastiriotis (2016), and Nicolini and Resmini (2011).…”