Chapter 6Chapter 6

GlobalisationGlobalisation

GlobalisationGlobalisation

““Involves declines in the importance of Involves declines in the importance of national political boundaries and national political boundaries and geographical distance and increasingly geographical distance and increasingly complex interdependencies among complex interdependencies among countries”countries”

EBRD 2001EBRD 2001

Movement of people, goods and services, Movement of people, goods and services, raw materials, financial capital and raw materials, financial capital and enterprises, technology as well as brand enterprises, technology as well as brand names, knowledge, ideas, culture, values...names, knowledge, ideas, culture, values...

GlobalisationGlobalisation

New surge after WWIINew surge after WWII Related to:Related to:

• technological advances making distances technological advances making distances shorter and costs lowershorter and costs lower

• political decisions :political decisions :– e.g. EU, WTO, UNe.g. EU, WTO, UN

GlobalisationGlobalisation

Advantages Advantages • increase in opportunities, increase in opportunities,

choice, freedom choice, freedom • specialisation, division of specialisation, division of

labour, and risk labour, and risk diversificationdiversification

• dissemination of dissemination of knowledge (e.g. health knowledge (e.g. health care), culture and care), culture and educational exchangeeducational exchange

• workers moving from few workers moving from few opportunities spaces to opportunities spaces to countries with ageing and countries with ageing and decreasing working decreasing working populationpopulation

DisadvantagesDisadvantages• pathological globalisationpathological globalisation

– global crime and global crime and terrorismterrorism

– diseasesdiseases– environmental spillovers environmental spillovers

(acid rain, greenhouse (acid rain, greenhouse gases, overfishing…)gases, overfishing…)

– global financial threats global financial threats and panicsand panics

• unfair distribution of gainsunfair distribution of gains– winners and losers:winners and losers:– incomes of people in incomes of people in

certain sectors certain sectors – no safety net or no safety net or

compensationcompensation

GlobalisationGlobalisation

To ensure wide and fair distribution of gains To ensure wide and fair distribution of gains → Global action (governments, international → Global action (governments, international institutions, pressure groups…) and institutions, pressure groups…) and cooperationcooperation

institutions and international legal and institutions and international legal and regulatory measuresregulatory measures• rule of law rule of law • environmental, labour, and safety standardsenvironmental, labour, and safety standards• pensions systems, health insurancepensions systems, health insurance• companies taxation, financial regulation and companies taxation, financial regulation and

supervisionsupervision need to strike a balanceneed to strike a balance

Globalisation and Globalisation and transitiontransition

Stunning in terms of scope and speed in Stunning in terms of scope and speed in transition transition • out of long period of planned and self-sufficiencyout of long period of planned and self-sufficiency• trade was defined according to the CMEAtrade was defined according to the CMEA

– excessive specialisation and division of work not related to excessive specialisation and division of work not related to comparative advantagescomparative advantages

• no labour mobility and financial integration outside no labour mobility and financial integration outside CMEACMEA

• but educated and skilled labour forcebut educated and skilled labour force Transition processTransition process

• outward focus: free trade and inflow of capitaloutward focus: free trade and inflow of capital• democracy (rule of law, welfare), increased choicedemocracy (rule of law, welfare), increased choice• but difficult, slow and costly process for some countries but difficult, slow and costly process for some countries

Theoretical BackgroundTheoretical Background

Transition → Opening of markets in CEECs. Transition → Opening of markets in CEECs. Integration between Eastern and Western Integration between Eastern and Western Europe will involveEurope will involve• labour mobility = CEE workers into EUlabour mobility = CEE workers into EU• mobility of goods and services = growing mobility of goods and services = growing

international trade in goods and servicesinternational trade in goods and services• mobility of capital = mobility of companies in mobility of capital = mobility of companies in

search off expanding markets and/or lower costssearch off expanding markets and/or lower costs EU members: Fear of flow of employees and EU members: Fear of flow of employees and

firms moving awayfirms moving away

High value added

Routineactivities

EUCompany

CEECmarkets

EU markets

Growth potential

Lowerlabour costs

High income andGrowth potential

Technologyskills

Labour mobilityLabour mobility

CEECs: large source of employment at low CEECs: large source of employment at low wages wages

EU: high income country paying higher wages EU: high income country paying higher wages than CEECs and needing workers than CEECs and needing workers

Expectations = huge flow of workers: Expectations = huge flow of workers: • low skilled workers will move from CEECs to EU in low skilled workers will move from CEECs to EU in

search of better payment to do routine work and for search of better payment to do routine work and for EU firms this means lower costs due to lower EU firms this means lower costs due to lower wages. wages.

Reality different: Reality different: • EU imposed stronger restrictions on movement; EU imposed stronger restrictions on movement;

different languages and cultures plus rigid markets different languages and cultures plus rigid markets = barriers = barriers

Mobility of goods and Mobility of goods and servicesservices

If labour mobility is hardly possible (and perhaps If labour mobility is hardly possible (and perhaps hinders development) then:hinders development) then:

International trade = mobility of goods:International trade = mobility of goods:• for CEECs exports = increase production and for CEECs exports = increase production and

employment employment • for EU the CEECS are new expanding market = also for EU the CEECS are new expanding market = also

growing exports and employmentgrowing exports and employment Outcome depends on comparative advantagesOutcome depends on comparative advantages

• CEECS doing low skilled routine worksCEECS doing low skilled routine works• EU high skilled high technology so that low skilled in EU high skilled high technology so that low skilled in

EU are worse off potentially in unemployment in the EU are worse off potentially in unemployment in the long runlong run

Reality: Reality: Education levels are high in CEECs so also Education levels are high in CEECs so also skilled work there → intra industry trade and less skilled work there → intra industry trade and less disruptiondisruption

Mobility of goods and Mobility of goods and servicesservices

Evidence:Evidence:• Pre-transition in 1988Pre-transition in 1988

– all sectors of manufacturing were exporting to the EU.all sectors of manufacturing were exporting to the EU.– The exports clustered into narrow product groupsThe exports clustered into narrow product groups– Clustering persistedClustering persisted

• Transition:Transition:– Reduction of trade restriction (tariffs and non-tariffs)Reduction of trade restriction (tariffs and non-tariffs)– Free movement of capitalFree movement of capital– boom in trade with EUboom in trade with EU

– most CEECs more than 50% of trade with EUmost CEECs more than 50% of trade with EU

– Positive investment shocks for EU-oriented productsPositive investment shocks for EU-oriented products

Mobility of goods and Mobility of goods and servicesservices

– Negative demand shocks for CMEA-oriented Negative demand shocks for CMEA-oriented products, supply rigidities products, supply rigidities hard for firms hard for firms exporting to CMEA and need to redirect product exporting to CMEA and need to redirect product and tradeand trade

– no evidence of “tragic consequences”no evidence of “tragic consequences”– increase in employment in exporting sectors in increase in employment in exporting sectors in

EUEU– a small risk of unemployment for unskilled a small risk of unemployment for unskilled

workers In EUworkers In EU

Share of CMEA and EU trade 1990-1996Share of CMEA and EU trade 1990-1996*annual average percentage growth; ** *annual average percentage growth; ** percentpercentsource: Hoekman and Djankov (97)source: Hoekman and Djankov (97)

Country Export Growth* Share of exports** EU CMEA 1990-

93 1993-96 (90) (93) (96) (90) (93) (96)

Bulgaria 13.4 22.3 40 46 51 30 16 19 Hungary 7.1 14.3 50 56 71 34 14 21 Poland 5.9 16.2 51 70 69 33 11 21 Romania 6.2 16.7 36 40 54 35 11 10

Share of EU oriented Products within Share of EU oriented Products within sectors in 1988sectors in 1988

Sector Bulgaria Hungary Poland Romania1 0.10 0.13 0.11 0.102 0.18 0.21 0.22 0.153 0.07 0.18 0.07 0.094 0.21 0.15 0.15 0.235 0.07 0.12 0.09 0.106 0.06 0.23 0.13 0.147 0.12 0.15 0.08 0.128 0.20 0.25 0.23 0.119 0.14 0.19 0.15 0.1210 0.08 0.16 0.10 0.0811 0.08 0.17 0.18 0.0712 0.13 0.20 0.15 0.0713 0.10 0.13 0.06 0.06

Share of new EU oriented Products within Share of new EU oriented Products within sectors in 1996sectors in 1996

NACE Bulgaria Hungary Poland RomaniaDA 0.02 0.02 0.02 0.02DB 0.04 0.05 0.05 0.04DC 0.08 0.04 0.11 0.06DD 0.08 0.06 0.06 0.04DE 0.03 0.08 0.07 0.03DF 0.02 0.06 0.02 0.07DG 0.01 0.04 0.06 0.01DH 0.05 0.05 0.06 0.02DI 0.04 0.06 0.06 0.03DJ 0.02 0.03 0.05 0.03DK 0.07 0.05 0.07 0.07DL 0.06 0.03 0.05 0.03DM 0.04 0.01 0.04 0.03

Export with EU-15 as % of total

0

10

20

30

40

50

60

70

80

90

Bulgaria CzechRepublic

Poland Estonia Lithuania Latvia Hungary Romania Slovenia Slovakia

1993 1994 1995 1996 1997 1998 1999 2000 2001

Imports with EU-15 as % of total

0

10

20

30

40

50

60

70

80

Bulgaria CzechRepublic

Poland Estonia Lithuania Latvia Hungary Romania Slovenia Slovakia

1993 1994 1995 1996 1997 1998 1999 2000 2001

Export with EU-15 as % of total

0

10

20

30

40

50

60

70

80

90

1993 1994 1995 1996 1997 1998 1999 2000 2001Bulgaria Czech Republic Poland EstoniaLithuania Latvia Hungary RomaniaSlovenia Slovakia

Imports with EU-15 as % of total

0

10

20

30

40

50

60

70

80

1993 1994 1995 1996 1997 1998 1999 2000 2001

Bulgaria Czech Republic Poland Estonia Lithuania

Latvia Hungary Romania Slovenia Slovakia

1993 1994 1995 1996 1997 1998 1999 2000 2001Bulgaria 28.1 35.5 37.5 38.8 43.2 50.4 52.1 51.1 54.8 exportBulgaria 28 32.1 36.5 32.1 37.7 45.2 48.4 44 49.4 importCzech Republic 41.6 45.2 60.9 58.2 59.9 64 69.2 68.6 68.9 exportCzech Republic 42.6 45 61.1 62.4 61.5 63.5 64.2 62 61.8 importPoland 64.3 62 63.3 66.3 64.2 68.3 70.5 69.9 69.2 exportPoland 57.6 56.4 63.4 63.9 63.8 68.3 64.9 61.2 61.4 importEstonia 17.8 19 54.1 51 48.6 66.7 72.5 76.5 69.4 exportEstonia 23.3 23.9 66 64.7 59.2 67.8 65.3 62.6 56.5 importLithuania 18.86 25.76 36.36 32.89 32.5 38 50.1 47.9 47.8 exportLithuania 18.73 26.39 37.13 42.42 44.3 47.2 46.5 43.3 44 importLatvia 24.35 27.92 44.09 44.69 48.9 56.6 62.5 64.6 61.2 exportLatvia 17.13 25 49.98 49.24 53.2 55.3 54.5 52.4 52.6 importHungary 46.5 51 62.8 69.7 71.2 72.9 76.2 75.1 74.3 exportHungary 40.1 45.3 61.5 62.3 62.8 64.1 64.4 58.4 57.8 importRomania 41.3 48.2 54.13 56.5 56.6 64.5 65.5 63.8 67.8 exportRomania 45.3 48.2 50.5 52.3 52.5 57.7 60.7 56.6 57.3 importSlovenia 42.6 59.2 67 64.6 63.6 65.5 66 63.8 62.2 exportSlovenia 46.2 57.1 68.8 67.5 67.4 69.4 68.6 67.8 67.7 importSlovakia 24.1 28.4 37.8 41.3 45 55.7 59.4 59 59.9 exportSlovakia 20.6 26.2 34.8 37.3 39.5 50.1 51.7 48.9 49.8 import

Exports and Imports to EU-15 (%)Exports and Imports to EU-15 (%)

Capital mobilityCapital mobility Relocation of firms and Foreign Direct InvestmentRelocation of firms and Foreign Direct Investment Reasons for EU:Reasons for EU:

• Cost-reduction approach: Cost-reduction approach: – lower labour costs in CEECs so that EU firms can do routine lower labour costs in CEECs so that EU firms can do routine

works cheaper and then sell back the goods to EU marketsworks cheaper and then sell back the goods to EU markets

• Expansionary approach:Expansionary approach:– potential growing demand and expanding market, want to potential growing demand and expanding market, want to

ensure local presence in CEECs so also move there ensure local presence in CEECs so also move there

For CEECs: For CEECs: • FDI creates production and employmentFDI creates production and employment

EU members fear unemployment of unskilled but EU members fear unemployment of unskilled but if expansion is reason then less disruption in EUif expansion is reason then less disruption in EU

FDI (net) Inflows in Mio Euro

0

2000

4000

6000

8000

10000

12000

1995 1996 1997 1998 1999 2000 2001

Bulgaria Poland Estonia Latvia

Lithuania Czech Republic Slovakia Romania

Slovenia Hungary

0 2000 4000 6000 8000 10000 12000

Bulgaria

Poland

Estonia

Latvia

Lithuania

Czech Republic

Slovakia

Romania

Slovenia

Hungary

1995 1996 1997 1998 1999 2000 2001

Foreign Direct Investment (net) Inflows in Mio Euros1995 1996 1997 1998 1999 2000 2001

Bulgaria 69 88 445 479 735 1084 775Poland 2797 3542 4328 5678 6821 10115 6377Estonia 154 119 235 513 284 435 603Latvia 136 301 460 318 324 442 198Lithuania 55 120 313 826 456 410 498Czech Republic 1960 1125 1148 3302 5932 5405 5489Slovakia 181 279 154 504 306 2417 1414Romania 320 207 1071 1812 977 1110Slovenia 235 210 331 221 170 190 390Hungary 3675 1803 1928 1815 1873 1837 2730Russia

FDI in Russia in Mio US Dollars

-1,000

0

1,000

2,000

3,000

4,000

5,000

1995 1996 1997 1998 1999 2000 2001

Russia

Capital mobilityCapital mobility

Relocation of firms has been an ongoing Relocation of firms has been an ongoing process for the reasons above but:process for the reasons above but:• a lot to other OECD countries and only a small a lot to other OECD countries and only a small

share of EUFDI goes to CEECsshare of EUFDI goes to CEECs– Belgian operations in CEECs = 10.7% of all foreign Belgian operations in CEECs = 10.7% of all foreign

operationsoperations– German FDI in 1995: only 2% to CEECs German FDI in 1995: only 2% to CEECs

• has been growing but below initial expectationshas been growing but below initial expectations• in specific sectors: construction, foods and in specific sectors: construction, foods and

beverages, leather and footwear, textiles and beverages, leather and footwear, textiles and clothing clothing EU job losses in these sectors EU job losses in these sectors

• lack of opportunities at homelack of opportunities at home

ApplicationsApplications

1. Effects of globalisation on the 1. Effects of globalisation on the labour marketlabour market

2. FDI and spillovers2. FDI and spillovers

Globalisation & JobsGlobalisation & Jobs

Postal survey of Belgian firms: Postal survey of Belgian firms: 1580 1580 questionnaires. 312 firms replied (20%) questionnaires. 312 firms replied (20%) in in • manufacturing: food, tobacco, chemicalmanufacturing: food, tobacco, chemical• services and retailservices and retail• matching with company accounts 260; average matching with company accounts 260; average

employment 420; median employment 45employment 420; median employment 45 Questions on domestic and foreign Questions on domestic and foreign

competition, sources, and actions taken in face competition, sources, and actions taken in face of itof it

Estimate home labour demand in face of Estimate home labour demand in face of foreign competition foreign competition

Changes in competitionChanges in competition

1986-1989 1990-1995Increase No change Decrease Increase No change Decrease

Domestic 39% 55% 6% 54% 37% 9%Foreign 51% 45% 3% 81% 16% 3%

Source of foreign competitionSource of foreign competition(*) Western Europe, USA, Canada, Australia (**) (*) Western Europe, USA, Canada, Australia (**) e.g. Latin-America, Turkey, Middle-East, Africa. e.g. Latin-America, Turkey, Middle-East, Africa. Rank 1 refers to the highest rank.Rank 1 refers to the highest rank.

Region (period 1986-1989) Rank 1 Rank 2 Rank 3 Rank 4 No RankWestern Countries (*)Central- and Eastern EuropeSouth-East AsiaOthers (**)

79%6%15%9%

8%18%20%9%

6%20%19%7%

1%12%9%12%

7%43%38%63%

Region (period 1990-1995) Rank 1 Rank 2 Rank 3 Rank 4 No RankWestern Countries (*)Central- and Eastern EuropeSouth-East AsiaOthers (**)

66%17%20%9%

11%26%19%7%

9%15%18%9%

2%11%9%14%

12%31%33%61%

Reasons for increased competitionReasons for increased competitionRank 1 is the most important, Rank 5 is the least Rank 1 is the most important, Rank 5 is the least important. Columns do not sum to a 100% since important. Columns do not sum to a 100% since the same rank to multiple options was allowed.the same rank to multiple options was allowed.

Increase in ForeignCompetition due to …

Rank 1 Rank 2 Rank 3 Rank 4 Rank 5 No Rank

TechnologicalDevelopments

16% 12% 18% 16% 1% 37%

Product Innovation 16% 14% 19% 13% 1% 37%Labour Costs 49% 16% 6% 9% 3% 18%Globalisation 18% 15% 11% 16% 0% 40%Other Reasons 21% 6% 4% 2% 2% 66%

The response to increased competitionThe response to increased competition

Action PercentagesModernising the production process 32%Cutting the workforce 29%Outsourcing some part of the production process 16%Increasing the workforce 13%Delocalising the production process 12%Retraining employees 12%Other measure taken 13%

Reasons to invest abroadReasons to invest abroad

Reason to invest Rank 1Explore new markets 43%Achieve a strategic position on these markets 37%Making use of cheaper labour 26%Making use of the fiscal advantages 2%Expect target country to enter eu 7%Other reasons 2%

Productivity of CEE production facility Productivity of CEE production facility compared to its Belgian counterpartcompared to its Belgian counterpart

Relative Productivity in CEE PercentageMuch lower 23%Lower 50%Equal 19%Higher 6%Much Higher 2%

Risk factors for investing in CEECsRisk factors for investing in CEECs

Risk Factors Rank 1Lack of clear legislation 25%Political instability 19%Uncertainty about the currency value 18%Insufficiently developed market economy 15%Difficulties in obtaining management control 13%Insufficiently developed capital market 11%Defincient infrastructure 11%Lack of market information 9%Aged production technology 8%Other risk factors 8%Lack of protection of property rights 7%Uncertainty about price fluctuations 7%Lack of protection of intellectual rights 6%

Most important risk factors in FDI in Most important risk factors in FDI in Central and Eastern EuropeCentral and Eastern Europe

Internal constraintsInternal constraints• human resources constraints (appropriate human resources constraints (appropriate

local staff,…)local staff,…)• Budgetary constraintsBudgetary constraints• Lack of information/knowledgeLack of information/knowledge

External constraintsExternal constraints• economic climate, market considerationseconomic climate, market considerations• political climatepolitical climate• cultural considerationscultural considerations

Home labour demand equation Home labour demand equation dependent variable: ln(L)dependent variable: ln(L)

(1) (2) (3)Ln(w) -0.60**

(0.04)-0.60**(0.04)

-0.54**(0.04)

Ln (Q) 0.46**(0.02)

0.46**(0.02)

0.31**(0.03)

Ln(K) 0.13**(0.01)

0.13**(0.01)

0.12**(0.01)

Comp 0.03(0.26)

0.05(0.13)

0.07(0.13)

Fcompetition 0.42**(0.13)

FcompetitionCEE 0.42**(0.21)

-4.70**(0.90)

FcompetionSEA 0.40**(0.18)

-1.16(0.87)

FcompetitionWest 0.15(0.14)

-2.20**(1.08)

FcompCEExln(Q) 0.37**(0.06)

FcompSEAxln(Q) 0.12**(0.06)

FcompWestxln(Q) 0.18**(0.04)

Investment 0.07(0.15)

-0.04(0.15)

-0.03(0.16)

Number ofobservations

152 152 152

Global R2 0.82 0.82 0.81

Labour Demand dependent variable: ln(L)Labour Demand dependent variable: ln(L)(GLS Results), standard errors between brackets, (GLS Results), standard errors between brackets, * means statistical significant on the 5% level.* means statistical significant on the 5% level.

(1) (2) (3)lowly skilled

(4)highly skilled

Ln(w) -0.63*(0.041)

-0.55*(0.049)

-0.40*(0.07)

-0.36*(0.07)

Ln (Q) 0.48*(0.019)

0.25*(0.03)

0.52*(0.07)

0.44*(0.06)

Comp 0.09(0.16)

0.14(0.18)

-0.07(0.27)

-0.16(0.23)

FcompCEE 0.56*(0.26)

-6.38*(0.96)

-4.78*(1.57)

-2.16*(1.50)

FcompSEA 0.55*(0.23)

-2.47*(0.90)

1.53(1.42)

-0.52(1.45)

FcompWest 0.29*(0.17)

-3.35*(0.54)

0.41(1.08)

-1.22(1.09)

Technology 0.57*(0.15)

0.022(0.42)

0.33(0.58)

0.21(0.51)

FcompCEExln(Q) 0.52*(0.066)

0.38*(0.11)

0.21*(0.10)

FcompSEAxln(Q) 0.23*(0.064)

-0.055(0.10)

0.08(0.10)

FcompWestxln(Q) 0.27*(0.039)

-0.03(0.08)

0.09(0.07)

University -0.005(0.04)

-0.022*(0.007)

0.15*(0.006)

Univxtechnology 0.029*(0.012)

0.010(0.016)

0.035*(0.014)

FcompCEExtechnology

-0.64(0.58)

-0.63(0.78)

-1.10**(0.67)

FcompSEAxtechnology

0.15(0.54)

-0.10(0.73)

-0.85(0.64)

FcompWestxtechnology

0.21(0.44)

0.14(0.61)

-0.17(0.54)

Year dummies Yes Yes Yes YesNumber ofobservations

916 916 583 651

Global R2 0.7 0.7 0.62 0.68

Globalisation & JobsGlobalisation & Jobs

Both domestic and foreign competition Both domestic and foreign competition increased increased

foreign competition strongerforeign competition stronger Sources (countries)Sources (countries)

• only 6% of firms in 86-89 and 17% in 90-95 only 6% of firms in 86-89 and 17% in 90-95 say CEECs is main source of competitionsay CEECs is main source of competition

• 66% say it comes from West66% say it comes from West main source of competition: main source of competition:

• lower foreign wages but only for 50% of firms.lower foreign wages but only for 50% of firms.• Other sources: innovation and exchange rateOther sources: innovation and exchange rate

Globalisation & JobsGlobalisation & Jobs Reasons for relocationReasons for relocation

• market opportunity and strategic position not market opportunity and strategic position not costs costs so expansionary approach rather than so expansionary approach rather than cost reductioncost reduction

Actions taken in face of competition:Actions taken in face of competition:• restructuringrestructuring• reduction but also increase in employmentreduction but also increase in employment• only 12% say relocationonly 12% say relocation

Labour demand I: Labour demand I: • wages(-), production(+), size or capital(+), wages(-), production(+), size or capital(+), • foreign competition (+) for large firms but (-) for foreign competition (+) for large firms but (-) for

small firmssmall firms

Globalisation & JobsGlobalisation & Jobs

Labour demand II: Labour demand II: • wages(-), production(+), wages(-), production(+), • foreign competition (+) for large firms but (-) foreign competition (+) for large firms but (-)

for small firms and CEECs has largest effect, for small firms and CEECs has largest effect, • technology (+) when in the presence of technology (+) when in the presence of

graduatesgraduates• foreign competition from CEECs twice as (-) foreign competition from CEECs twice as (-)

for unskilled (blue collar workers) as for unskilled (blue collar workers) as compared to skilled (white collar workers - compared to skilled (white collar workers - as expected as expected

Globalisation & Jobs IIGlobalisation & Jobs II

Paper (2001, Konings, Murphy]: Paper (2001, Konings, Murphy]:

Do multinational enterprises Do multinational enterprises substitute parent Jobs for foreign substitute parent Jobs for foreign ones? Evidence from firm level ones? Evidence from firm level panel datapanel data

Distribution of parent firms across the EU Distribution of parent firms across the EU in the samplein the sample

Parent Country Frequency of FirmsAustria 1.77%Belgium 10.34%Denmark 5.25%Ireland 0.13%Finland 3.65%France 17.74%Germany 29.94%Greece 0.56%Italy 9.98%Luxemburg 0.33%Netherlands 4.09%Portugal 0.11%Spain 3.37%Sweden 3.62%UK 8.12%

Distribution of subsidiaries across Distribution of subsidiaries across countriescountries

Affiliate Country Frequency of FirmsCentral and Eastern Europe 6.34%Austria 1.39%Belgium 9.29%Denmark 1.65%France 19.34%Germany 3.03%Netherlands 2.67%Ireland 1.01%Italy 11.34%Luxemburg 0.74%Portugal 1.89%Spain 18.71%Sweden 2.77%UK 19.83%

Summary statisticsSummary statistics

Overall Sample Manufacturing Non-manufacturingParent employment 2174 2452 1619Daughter employment (EU) 328 300 389Daughter employment (CEE) 669 674 660Parent unit wage cost 52.11 50.23 55.86Daughter unit wage cost (EU) 44.97 45.49 44.10Daughter unit wage cost (CEE) 8.48 7.85 9.49Parent value added per worker 213.29 148.09 349.23Daughter value added perworker (EU)

142.17 161.69 105.42

Daughter value added perworker (CEE)

21.43 23.81 17.6

Opportunity cost of capital 4.5% 4.5% 4.5%Distribution of Firms 100% 66.7% 33.3%

Correlations between employment growth Correlations between employment growth in parent firms and their affiliatesin parent firms and their affiliates

Whole sample Manufacturing Non-manufacturingGrowth rate in EUaffiliate employment

-0.0343***(0.016)

-0.0486***(0.022)

-0.019(0.023)

Growth rate in CEEaffiliate employment

-0.0444(0.103)

-0.018(0.020)

-0.196(0.268)

Conditional demand for parent Conditional demand for parent employmentemployment

Whole sample Manufacturing Non-manufacturing

Services Wholesale andconstruction

Wp -0.895***(0.033)

-0.999***(0041)

-0.743***(0.054)

-0.707***(0.086)

-0.761***(0.06)

Weu 0.073***(0.021)

0.125***(0.023)

-0.081**(0.041)

-0.104**(0.049)

-0.022(0.078)

Wcee 0.015(0.022)

-0.013(0.024)

0.103**(0.048)

0.032(0.084)

0.132**(0.055)

Y 0.492***(0.016)

0.576***(0.020)

0.357***(0.027)

0.439***(0.035)

0.207***(0.043)

R -0.018(0.046)

-0.008(0.052)

-0.109(0.093)

-0.013(0.119)

-0.305**(0.146)

No. of observations 3964 2650 1314 848 466

Main results:Main results:

Increased globalisations did occur, Increased globalisations did occur, especially after 1990especially after 1990

only a few firms relocated their only a few firms relocated their production facilities, main reason for production facilities, main reason for FDI is to explore new marketsFDI is to explore new markets

Employment adjustment in response Employment adjustment in response to increased foreign competition did to increased foreign competition did happen and is not always negative, happen and is not always negative, also positive adjustment occurred.also positive adjustment occurred.

1. FDI and spillovers1. FDI and spillovers

Paper: The effects of FDI on Paper: The effects of FDI on domestic firms evidence from firm domestic firms evidence from firm level panel data in emerging level panel data in emerging economies (Konings, Oct. 2000)economies (Konings, Oct. 2000)

FDI and SpilloversFDI and SpilloversTe: Technology effectTe: Technology effectCe: Competition effectCe: Competition effect

ACTE

CE

AC(q)

q

Table 1: Summary Statistics (means of Table 1: Summary Statistics (means of sample)sample)

Bulgaria Romania PolandSectoral spillover 0.09 0.13 0.15Regional spillover 0.10 0.11 0.12Sales growth -0.27 0.47 0.07Employment growth -0.039 -0.042 -0.01Capital growth -0.287 0.10 0.03Material growth -0.25 0.50 0.03

Table 3: Results for BulgariaTable 3: Results for Bulgaria*: denotes significant at the 5 % level*: denotes significant at the 5 % level

IndependentVariables:

OLS IV IV

n 0.127 *(0.038)

0.538*(0.175)

0.560*(0.187)

k 0.047*(0.011)

0.012(0.038)

0.018(0.039)

m 0.626*(0.023)

0.720*(0.072)

0.738 *(0.075)

DFI -0.03(0.026)

-0.112(0.113)

- 0.176(0.136)

Sector spill -0.206*(0.091)

-0.670*(0.360)

-0.678*(0.371)

DFI x sector spill 3.528*(1.473)

6.199(12.184

5.225(12.40)

Region spill - - -0.175(0.206)

DFI x region spill - - 5.061(5.825)

Sargan test - 31.18 (df = 31) 30.1 (df=29)SOC test 0.248 -0.103 -0.025Number ofobservations

4662 4662 4662

Table 4: Results for RomaniaTable 4: Results for RomaniaDependent variable: yDependent variable: y

IndependentVariables:

OLS IV IV IV

Yt-1 - - 0.138*(0.034)

0.144*(0.035)

n 0.134*(0.017)

0.245*(0.073)

0.106*(0.06)

0.094**(0.063)

k 0.081*(0.011)

0.04**(0.026)

0.043*(0.02)

0.043*(0.02)

m 0.604*(0.017)

0.660*(0.036)

0.411*(0.04)

0.421*(0.044)

DFI 0.01*(0.002)

0.04(0.003)

0.001(0.02)

0.128(0.17)

Sector spill 0.201*(0.083)

0.436(0.459)

-1.101*(0.528)

-0.934**(0.579)

DFI x sector spill -32.52*(12.1)

-8.937(12.07)

-21.06(66.92)

-14.8(72.5)

Region spill - - - 0.063(0.128)

DFI x region spill - - - -2.93(4.18)

Sargan test - 15.14 (df=6) 60.3 (df=45) 59.27 (df=43)SOC test -3.708 -3.872 - -Number ofobservations

10955 10955 7111 7111

Table 5: Results for Poland Table 5: Results for Poland Dependent variable: yDependent variable: y

IndependentVariables:

OLS IV IV IV

n 0.01(0.14)

0.022(0.121)

0.062(0.108)

0.03(0.11)

k 0.017(0.03)

0.017(0.087)

0.059(0.083)

0.06(0.067)

m 0.429*(0.081)

0.487*(0.129)

0.613*(0.094)

0.527*(0.079)

DFI 0.178*(0.08)

0.215*(0.097)

0.13(0.11)

0.145*(0.062)

Sector spill -0.253(0.324)

0.174(0.790)

-0.191(0.689)

-0.172(0.721)

DFI x sector spill 1.14(2.162)

3.175(4.835)

-1.84(8.34)

-

Region spill - - 0.377(0.327)

-0.48**(0.301)

DFI x region spill - - 1.77 (10.84) -Sargan test - 12.77 (df=16) 19.03 (df=20) 16.92 (df=21)SOC test 0.171 0.536 0.07 0.391Number ofobservations

340 340 340 340