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Article Excerpt
Abstract. All countries are eager to attract as much foreign direct investments (FDI) as possible. At the same time FDI may have not only positive, but also negative economic effects for receiving countries. Positive effects are associated with technology transfer, efficient allocation of resources, and training of domestic workers. However, the entry of foreign firms could, e.g., lead to a decrease of labor productivity at domestic firms, which is a negative effect. The main purpose of this paper is to estimate direct and indirect effects of FDI. First, we test for direct influence of foreign direct investments on firms' performance, where the latter is estimated alternatively as labor productivity and as exports. FDI notably increases both labor productivity and export volumes. Second, we look for spillover or indirect effects. There is statistical evidence that the levels of FDI in certain regional industries are associated with higher performance indicators of firms' not receiving FDI in those same regional industries.
JEL Classification: L1, L6, F2
Key words: foreign direct investment, firm performance, spillovers, Ukraine
1. Introduction
In 1991, Scotland paid 50.75 million pounds for Motorola to locate a mobile-phone factory employing 3000 people. In the late 1980s, Toyota was offered an incentive package worth 125-147 million dollars in present value for a plant expected to employ 3000 workers (Haskel et al., 2002). Ireland encourages foreign direct investment (FDI) by introduction of a National Development Plan that increases the value and sustainability of foreign companies, and secures their future. (2) Why does government attract FDI? Is FDI always beneficial for a country? During the last few years many scholars have raised this question. While attracting FDI is an important issue in itself, international investments may also lead to different externalities. As a rule, FDI to a particular firm in a particular industry may give rise to positive effects on the performance of other firms that entertain business relations with the FDI-recipient. However, we cannot unambiguously assert these effects of FDI in transition economies, and in Ukraine in particular. As a rule, transition changes the way economy operates and may lead to unexpected results. Therefore FDI can bring both positive and negative externalities. Negative spillovers could occur in the form of raised monopoly power of Multi National Corporations (MNC). These MNCs may have a strong incentive to acquire and close Ukrainian competitors.
The collapse of the Soviet Union in 1991 created 15 independent states. One of those countries was Ukraine, with a land area of 604,000 square kilometers (232,000 square miles) and a population of about 50 million. "In the 1980s, Ukraine produced 16-18% of Soviet industrial output and 23-25% of Soviet agricultural output: in 1989 it produced 34% of Soviet steel, 23.5% of coal, 46% of iron ore, 56% of sugar and 36% of TVs" (Yegorov, 1999). The Ukraine therefore owned significant economic potential, but it was not used adequately. Due to lack of competition from domestic firms, cheap labor, large consumption, and high interest rates, which exceeded average profit rates in developed countries, the Ukraine was supposed to be a highly attractive country for FDI. However, investors turned out not to be in a hurry. In 1995, FDI per capita in the Ukraine amounted to only US $ 13, compared to US $ 1,017 in Hungary and US $ 575 in the Czech Republic. After 1995 however, investors started to increase investment in Ukrainian objects. This is somewhat surprising, as there were further business recession, deterioration of equipment, instability of the macroeconomic situation and other problems which should have impeded FDI inflows. (3) The government frequently issued unanticipated legal amendments in the middle of the year, when plans for most companies' development were already established. There were also numerous cases of corruption and bribery which should have counteracted an increase in FDI levels. Nevertheless, foreign investors came.
Recent empirical studies carried out by Blomstrom and Sjoholm (1999), Ponomareva (2000) and Smarzynska (2002) have found positive effects of FDI on different indicators of firm's performance in Indonesia, Russia and Lithuania. They show that an increase in FDI leads to an increase in the level of local capability and competition. However, the results vary across countries and across industries within a particular country. Furthermore, negative spillovers are found by Aitken and Harrison (1999), Konings (2000) for Venezuela, Romania and Poland. Theory tells us that FDI has direct and indirect impacts. Direct FDI effects contribute to the differences in performance of firms with and without FDI. Indirect effects are spread through specific contacts between MNCs and domestic forms.
The technology transfer effect appears when domestic firms receive new technologies and know-how for lower costs from MNCs. The catch-up effect simply means that foreign firm captures the share of local market or domestic firm looses its market share. At the same time, the latter effect may have positive influence on local firms. In this case, it is called competition effect. Competition effect arises when entrance of foreign firms forces domestic firms to act more efficiently in order to protect their profits and shares. The foreign linkage effect appears when foreign companies use services supplied by local firms. Demonstration effect appears when a home firm, observing the behavior of foreign company, tries to mimic it. Finally, the training effect is a situation when foreign firms provide training for their workers and managers, who in future can be hired by domestic firms.
Attracting Foreign Direct Investment has already become one of the most essential issues in the transformation and development of the Ukrainian economy. Because of substantial technological lags in comparison to developed countries, Ukraine could benefit from foreign capital inflows and the resulting international cooperation. This cooperation, in turn, could provide new technologies, new methods of management, and could also promote the development of domestic investments. Experiences of developed countries suggest, that often a domestic investment boom starts with the adaptation of new technologies, brought on with foreign capital.
Currently however, the Ukrainian level of FDI per capita is far below that of most other transition countries, in particular that of the Estonia, Hungary or Poland. For example, the USA only invested ten times more into the Polish economy than into the Ukrainian one. (4) Such negligible volumes of FDI could be explained by the discouraging investment climate, presently prevailing in Ukraine. This is also represented by suspicious attitudes towards foreign investors displayed by both government officials and Ukrainian industry...
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