the effect of direct foreign investment on domestic firms

The Effects of Direct Foreign Investment on DomesticFirms: Evidence from Firm Level Panel Data in

Emerging Economies

By: Jozef Konings

Working Paper Number 344October 2000

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William Davidson Institute Working Paper 344

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The Effects of Direct Foreign Investment on Domestic Firms: Evidence fromFirm Level Panel Data in Emerging Economies

By Jozef KoningsLICOS, Centre for Transition Economics

Economics DepartmentCatholic University of Leuven

De Beriotstraat 343000 Leuven

Belgium

Other affiliations: CEPR, London; Dartmouth College, USAEmail: [email protected]

August 2000

Acknowledgements: This paper is part of a project on DFI in Central and EasternEurope, funded by the Thyssen foundation. I appreciate comments from FilipAbraham, Lode Berlage, Hans Degryse, Nina Pavnic, Koen Schoors, HylkeVandenbussche and Reinhilde Veugelers. This paper benefited from seminars at theKULeuven, the University of Gent, the University of Antwerp (Ufsia) and the IMF. Ithank Giulia Faggio and Frederic Warzynski for assistance.


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Non-Technical Summary

The collapse of communism in Central and Eastern Europe and the emergence

of a market economy has led to a large inflow of direct foreign investment (DFI) in

the region during the last decade and in particular since the mid 90’s. Given the

enormous increase in foreign investment, these countries provide an ideal natural

experiment for measuring the impact of incoming foreign investment on performance.

In particular, this paper uses firm level panel data to investigate empirically the effects

of DFI on the productivity performance of domestic firms in three emerging

economies of Central and Eastern Europe: Bulgaria, Romania and Poland.

To this end a unique data set is used with detailed information on foreign

ownership at the firm level. Two main questions are addressed in the present paper:

(1) do foreign firms perform better than their domestic counterparts? (2) do foreign

firms generate spillovers to domestic firms?

There are various reasons why many policy makers believe DFI is beneficial

to their country. A first reason is the need for strategic restructuring in firms in the

emerging countries. Most firms in the emerging economies of the former Soviet block

were characterised by obsolete machinery and outdated production methods. To

compete in a market environment, firms had to improve their efficiency by engaging

in strategic restructuring, i.e. updating the equipment and production process. Foreign

firms have the technological know-how and finance necessary to update the

equipment and bring about such strategic restructuring. Foreign participation in

domestic firms has the additional benefit that it can impose an efficient corporate

governance in privatized firms, often privatized to insider workers/managers, who

might block restructuring. A second important reason why foreign investors are

invited to emerging countries rests on the believe that they generate positive


4

externalities to the domestic firms through a transfer of know-how and technology.

Such spillovers can occur through various channels: the introduction of new products

and production processes by foreign firms may benefit domestic firms through the

accelerated diffusion of new technology. This could occur through labour turnover or

through imitation or other channels. One other channel works through the

equilibrating mechanism in the market when liberalization, here the opening up of

Central and Eastern Europe to the rest of the world, is implemented.

The positive externalities generated by foreign investors, however, may vanish

if the increased competition from foreign firms leads to a reduction in the production

of the domestic firm, which may lead to an increase in the average costs of

production. In this case a negative competition effect may dominate a positive

technological spillover effect. In this paper, the net effect is studied.

Only in Poland, I find that foreign firms perform better than firms without

foreign participation. In Bulgaria and Romania, no robust evidence is found of a

positive foreign ownership effect. This may be due to the fact that it takes time for

firms to restructure and that the effects of restructuring on productivity performance

only appear after a few years. Since Bulgaria and Romania are less advanced in the

transition process compared to Poland this may be a plausible explanation.

Moreover, for all three countries studied here, I find no evidence of positive

spillovers to domestic firms on average. In contrast, on average there are negative

spillovers to domestic firms in Bulgaria and Romania, while there are no spillovers to

domestic firms in Poland. This suggests a negative competition effect that dominates

a positive technology effect.


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Abstract

This paper uses firm level panel data to investigate empirically the effects of

direct foreign investment (DFI) on the productivity performance of domestic firms in

three emerging economies of Central and Eastern Europe, Bulgaria, Romania and

Poland. To this end a unique firm level panel data set is used with detailed

information on foreign ownership at the firm level. Two main questions are addressed

in the present paper: (1) do foreign firms perform better than their domestic

counterparts? (2) do foreign firms generate spillovers to domestic firms?

The estimation technique in this paper takes potential endogeneity of

ownership, spillovers and other factors into account by estimating a fixed effects

model using instrumental variables in the general methods of moment technique for

panel data.

Only in Poland, I find that foreign firms perform better than firms without

foreign participation. Moreover, for all three countries studied here, I find no evidence

of positive spillovers to domestic firms on average. In contrast, on average there are

negative spillovers to domestic firms in Bulgaria and Romania, while there are no

spillovers to domestic firms in Poland. This suggests a negative competition effect

that dominates a positive technology effect

JEL classification: D24, F14, O52, P31

Keywords: Foreign Investment, Spillovers, Emerging countries, Panel data


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I. Introduction

This paper uses firm level panel data to investigate empirically the effects of

direct foreign investment (DFI) on the productivity performance of domestic firms in

three emerging economies of Central and Eastern Europe, Bulgaria, Romania and

Poland. The collapse of communism in Central and Eastern Europe and the

emergence of a market economy has led to a large inflow of DFI in the region during

the last decade and in particular since the mid 90’s. Figure 1 shows the evolution of

DFI since 1991 for the three countries that I study in this paper, where the level of

DFI is normalized to 1 in 1991. By 1998 there was almost 10 fold increase in DFI in

Bulgaria compared to 1991, for Romania and Poland there was even a 50 and 60 fold

increase in DFI by 1998.

Figure 1 (source: author’s calculations based on EBRD (2000))

evolution of direct foreign investment in B, R and Pyear

DFI Bulgaria DFI Poland DFI Romania

1990 1992 1994 1996 1998

0

10

20

30

40

50

60


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Policy makers in the emerging economies were faced with a collapsing state

sector and a slowly growing private sector. With financial markets and commercial

banking virtually absent, they encouraged foreign investors to take part in the

privatization process or to invest in their countries. Given the enormous increase in

foreign investment in these countries as illustrated in figure 1, these countries provide

an ideal natural experiment for measuring the impact of incoming foreign investment

on performance.

There are various reasons why many policy makers believe DFI is beneficial

to their country. A first reason is the need for strategic restructuring in firms in the

emerging countries1. Most firms in the emerging economies of the former Soviet

block were characterised by obsolete machinery and outdated production methods. To

compete in a market environment, firms had to improve their efficiency by engaging

in strategic restructuring, i.e. updating the equipment and production process (e.g.

Irina Grossfeld and Gérard Roland, 1996). Foreign firms have the technological

know-how and finance necessary to update the equipment and bring about such

strategic restructuring. Foreign participation in domestic firms has the additional

benefit that it can impose an efficient corporate governance in privatized firms, often

privatized to insider workers/managers, who might block restructuring (Olivier

Blanchard, 1997, pp.77-88).

Klaus Wallner (1998) shows theoretically that especially in the emerging

countries, characterized by soft budget constraints, foreign investment is welcomed to

achieve such strategic restructuring as the presence of foreign investors gives

governments incentives to reduce subsidies to firms because otherwise a part of the

1 Strategic restructuring refers to improving the long run viability and efficiency of a firm.


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subsidy may disappear in ‘foreign pockets’. Hence, the hardening of budget

constraints increases effort by managers to restructure more.

A second important reason why foreign investors are invited to emerging

countries rests on the believe that they generate positive externalities to the domestic

firms through a transfer of know-how and technology. Such spillovers can occur

through various channels. David J. Teece (1977) argues that the introduction of new

products and production processes by foreign firms may benefit domestic firms

through the accelerated diffusion of new technology. This could occur through labour

turnover or through imitation or other channels. One other channel works through the

equilibrating mechanism in the market when liberalization, here the opening up of

Central and Eastern Europe to the rest of the world, is implemented.

A number of recent theoretical papers show that the degree to which domestic

firms may benefit from such spillovers depends on the “absorptive capacity” of

domestic firms. Franseca Sanna-Randacio (1999) and D. Leahy and Peter Neary

(1999) show that DFI always leads to an increase in the productivity of the investing

firm, however, DFI increases the host country’s productivity only if the degree of the

technological spillover is high enough. The latter is more likely achieved in sectors

characterized by intensive R&D or by firms which have a sufficient amount of

knowledge to start with.

This has been suggested in earlier empirical work. Ari Kokko (1994) and

Borensztein, De Gregorio and Lee (1998) give evidence which suggests that positive

DFI spillovers to local firms are only generated if the technology gap between the

foreign firm and the domestic one is not too large and if there exists a minimum

threshold of human capital in the host country.


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The technological spillovers thus lead to positive effects on domestic firms,

however, there may exist a competition effect which works in the opposite direction.

Foreign entry disturbs the existing market equilibrium and could force domestic firms

to produce less output which pushes them up their average cost curves, at least if

average cost curves are downward sloping, which would be the case if production

involves a substantial fixed cost. This argument has been developed by Brian J.

Aitken and Ann E. Harrison (1999). Which effect dominates depends on the stength

of the technological spillover effect (and the absorptive capacity of firms) versus the

competition effect.

In this paper I analyse a number of questions: First, I test whether foreign

owned subsidiaries in transition economies perform better than their domestically

owned counterparts. Second, I test whether there exist ‘spillovers’ to domestic firms. I

will look at the ‘net spillover’ effect, i.e. the sum of the technological spillover and

the competition effect. In addition, I will make a distinction between sectoral and

regional spillovers. I also test whether foreign firms benefit from the presence of other

foreign firms in their sector or region.

I use a unique panel data set of over 5000 firms in Bulgaria, Romania and

Poland for the years 1993-972. Together these countries cover more than 70 million

people and hence these economies are an important part of the Central and Eastern

European Economies. Bulgaria and Romania are lagging behind Poland in the

transition towards a market economy. While all three countries have experienced a

substantial collapse in output at the start of transition, only Poland has reached GDP

levels comparable to the pre-transition years and has positive growth rates. Both

Bulgaria and Romania experienced a short period of positive growth in the mid 90’s,

2 except for Romania data run from 1994 onwards.


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however, output has collapsed again in Bulgaria since 1995 and in Romania since

1997.

Because I use panel data I am able to track the same firm over time and hence

I am able to control for unobserved firm level fixed effects, like for example the

quality of the firm. Hence, as in Aitken and Harrison (1999) I am able to control for

the potential endogeneity of foreign ownership and spillovers . Moreover, I will use

the general methods of moments technique to estimate panel data as introduced by

Arellano and Bond (1991) which allows me to construct instruments for potentially

endogenous explanatory variables. This may be important if productivity shocks

affect the levels of the input variables in a production function or if they affect

spillovers. In that case fixed effects alone cannot properly control for the endogeneity.

Furthermore, this technique allows me to estimate dynamic equations in a consistent

way.

The next section describes the data and econometric approach, section III

gives the results and section IV is a concluding one.

II. Data and Econometric Approach

Data

The data set that is used provides information on 2321 firms in Bulgaria

between 1993-97, 3844 firms in Romania between 1994-87 and 262 firms in Poland

over the period 1993-1997. Due to a lot of missing observations on some of the input

factors needed in the estimation, the total available number of firms for the estimation

in Poland is much lower than in Bulgaria and Romania. The data are unbalanced

panel data, however, attrition is likely to be random due to imperfect reporting, rather


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than exit of firms. The data consists of the company accounts of all incorporated

firms in both the manufacturing and the non-manufacturing sectors satisfying at least

one of the following criteria: number of employees greater than 100, total assets and

operating revenues exceeding 16 million and 8 million USD, respectively. They are

retrieved from annual company accounts published by the Creditreform Bulgaria

OOD and by the Romanian Chamber of Commerce and Industry3.

Foreign firms are defined as firms where a positive fraction of the shares is

owned by a foreign investor in 1997. In the sample, around 10% of the firms have a

foreign investor in 1997. For those firms with a foreign partner, the average fraction

of shares held by foreign investors is 61%, 59% and 73% for Bulgaria, Romania and

Poland respectively. Thus if a domestic firm has a foreign investor, on average, the

foreign investor has a majority stake.

Econometric Approach and Measurement Issues

I follow Brian Aitken and Ann Harrison (1999) and estimate a log-linear

production function at the firm level to test whether (1) foreign firms perform better

than domestic ones, (2) there exist spillovers from DFI to local production. In

particular, the following specification is the starting point of my analysis:

itjtiiititititiit SpillXTDFIDFImkny εαααηααααα ++++++++= 7654321 (1)

3 Data are available on the Amadeus CD-ROM (Dec. 1998), a Pan European financial database,provided by Bureau van Dijk Electronic Publishing SA.


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where subscript i stands for firm i, subscript t for year t, y is log output, n is the log

employment, k is the log of capital and m is the log of material inputs. Output is

measured as sales at the firm level deflated by an aggregate price index. Sector level

price indices were not available on a consistent basis for the countries studied here, so

an aggregate producer price index was used for Romania and Poland, an aggregate

consumer price index for Bulgaria as there was no reliable producer price index

available for Bulgaria. These price indices were taken from the EBRD annual

transition report (EBRD, 2000). The capital stock is proxied by the book value of

tangible fixed assets in the firm, deflated by an aggregate price index. Finally,

material inputs are proxied by material costs have also been deflated by an aggregate

price index.

To capture possible common aggregate shocks in production, like

technological progress or some other unobserved time varying factors I include time

effects, η. The fraction of shares held by a foreign investor is denoted by DFI. It can

be noted that this variable has no time subscript, t, which is due to the fact that we

only observe ownership in the year 1997. I also interact foreign ownership with the

time trend to capture the fact that the effect of foreign ownership might affect both the

level and the growth in productivity. This might be the case if it takes some time for

foreign know-how to spillover to the local firm. Finally, Spill measures the sector

level spillovers that arise from foreign investors. I proxy it by the share of output

accounted for by foreign firms in total output at the 2-digit NACE sector level4. I will

also report results in which both sectoral and regional spillovers are taken into

account. The latter are measured as the fraction of output produced by foreign firms in

total output of a particular region. Finally, ε, is a white noise error term.

4 NACE is the standard European sector classification, which is comparable to the SIC classification.


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Table 1 provides summary statistics on the variables that were used in the

regression analysis. It can be noted that on average real sales are collapsing in

Bulgaria which is consistent with the macro economic decline in GDP since 1995. In

contrast, average real sales in Romania are growing rapidly, which is consistent with

the fast growth rates in GDP noted since the mid 90’s (until 1997, after which output

collapsed again). In Poland average real sales are growing at a more modest rate, but

the initial ‘catch up’ took place earlier since transition started earlier in Poland. In

absolute terms, the average growth in employment is always lower than the average

growth in sales, which confirms the observed aggregate stylized fact that the

adjustment in employment is much slower than the adjustment in output. From the

summary statistics it can also be noted that the average spillover effect is around 10%,

however this may vary substantially between sectors.

In equation (1), there is an unobservable fixed effect, iα , which captures firm

specific heterogeneity. Such an unobservable fixed effect is potentially correlated

with the other explanatory variables. If it is not controlled for in the estimation, then

inconsistent estimates due to an omitted variable bias result. One way of controlling

for these fixed effects is by first differencing equation (1). At the same time, it is a

way to control for potential endogeneity of foreign ownership, i.e. foreign investors

might only acquire shares in the better firms. If I categorise firms in ‘good’ versus

‘bad’ firms then the unobserved fixed effect captures this and hence it is possible to

avoid an endogeneity bias. First differencing equation (1) yields

itjtititititit spillDFImkny εααηαααα ∆+∆++∆+∆+∆+∆=∆ 764321 (2)


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The above modelling strategy allows me to test whether foreign firms perform

better and whether spillovers are present. However, equation (2) does not allow me to

test whether foreign firms benefit in a different way from spillovers than domestic

firms. It may be possible that foreign firms benefit from other foreign firms in their

sector, while domestic firms do not as in Aitken and Harrison (1999). For this reason I

will include an interaction term in equation (2), where I interact foreign ownership

with spillovers.

There is, however, a further econometric concern. An estimation by OLS of

equation (2) may still lead to inconsistent estimates. This would be the case if

productivity shocks have an effect on the input factors employed in the firm.

Alternatively, productivity shocks may have an effect on spillovers, which would lead

to an endogeneity of the spillovers. Furthermore, equation (2) is a static equation,

allowing for some dynamic adjustment in output (in case of the presence of

adjustment costs) would imply that equation (2) needs to be estimated with a lagged

dependent variable which leads to further endogeneity problems.

To avoid inconsistent estimates I therefore estimate equation (2) using the

General Methods of Moments technique (GMM) with Instrumental Variables as

developed by Arellano and Bond (1991) for estimating dynamic panel data. The

advantage of this method over other commonly used panel data estimation techniques

lies in its efficient use of the number of instruments generated for the endogenous

explanatory variables. For instance, in equation (2), valid instruments for the

differenced employment in the year 97 is the level of employment in the year 95 since

this is not correlated with the differenced error term in 1997. Table 2 shows in a


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systematic way how the number of instruments increases as the panel progresses. In

1995 a valid instrument for a first differenced endogenous explanatory variable is its

level in 1993, in 1996 valid instruments for the same variable includes its level in

1993 and its level in 1994 and so on. So as the panel progresses an increasing number

of instruments becomes available which increases the efficiency of the estimation. In

order to test the validity of instruments a Sargan test of instrument validity is

computed and is asymptotically χ2 distributed. In addition, since the equation is

estimated in first differenced form, the equation will show first-order serial

correlation. However, what matters is the absence of second order serial correlation if

the error term in the levels equation (1) is white noise. Therefore a test of second

order serial correlation is reported and is asymptotically N(0,1) distributed.

III. Results

Tables 3, 4 and 5 show the results for Bulgaria, Romania and Poland

respectively. I show both OLS estimates and GMM IV estimates for equation (2).

Since the equation is estimated in first-differences I also control for unobserved fixed

effects.

Starting with Bulgaria, the OLS estimates in column (1) of table 3 show no

statistically significant effect of foreign ownership on performance. This may come

across as a surprising result, however, in the context of transition economies it has

been shown that privatised firms do not perform better than state owned enterprises,

because it may take time before restructuring feeds through on firm performance (e.g.

Konings, 1997; Faggio and Konings, 1999). There is however a statistically

significant negative spillover effect of foreign firms on domestic ones, which suggests


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that a competition effect is dominating a technological spillover effect. The

interaction term, foreign X spillover, suggests that foreign firms benefit from the

presence of other foreign firms in the sector. However, this equation does not take

into account the potential endogeneity of spillovers and of the other input factors.

In the second column I therefore instrument all the input factors as well as the

spillover effect using the moment restrictions suggested by the GMM technique

(Arellano and Bond, 1991). A number of interesting results emerge. First, there still

exist negative spillovers from DFI to domestic firms. The coefficient that is estimated

with spillovers is equal to –0.67. Thus, a sector that has an increase in spillovers from

0 to 10% would experience a decline in total factor productivity of 6.7% on average.

This suggests that the competition effect is dominating, which means that domestic

firms, due to the increased competition from foreign firms in their sector, are pushed

up their average cost curves due to a reduction in output they can produce. This would

hold in case domestic firms have a declining average cost curve, i.e. in the presence of

increasing returns to scale. Based on the estimates of the coefficients of the input

factors, this hypothesis seems to be plausible. The sum of the coefficients of the input

factors is larger than 1 which suggests increasing returns to scale in production or a

declining average cost curve. Note, also that the coefficient on capital is low and

statistically not significant at conventional levels. In the context of transition

economies this is not surprising as most firms are characterised by outdated

equipment and a lack of investment in new equipment, which decreases the marginal

productivity of capital.

A second result, which is the same as in the OLS estimation, is that foreign

firms do not outperform domestic ones. Finally, the interaction effect between foreign

ownership and spillovers is no longer statistically significant, albeit still positive.


17

These IV results suggest that endogeneity may have been important in driving some

of the results in the OLS regression. The Sargan test and the second order serial

correlation test in collumn (2) all indicate that the model is correctly specified. The

fact that there is no second order serial correlation suggests that there is no further

dynamics to be specified in the model.

The third column tests whether regional spillovers may matter. As argued by

Aitken and Harrison (1999) there may be reasons to expect that any benefits to

domestic firms from foreign ivestment would be received first by their neighbors

before they diffuse to other domestic firms. One mechanism through which this may

occur is through job mobility. Workers who worked with a multinational that leave

the firm to work in a domestic one are more likely to move to another firm within the

same region. Job reallocation in transition countries (and elsewhere) occurs primarily

within regions rather than across regions (e.g. Faggio and Konings, 1999). I measure

regional spillovers as the fraction of output produced by foreign firms in a given

region in the total output produced by a given region. The results in column (3),

however, show no statistically significant effect of regional spillovers to domestic

firms in Bulgaria. Since Bulgaria is a small open economy regional effects are

presumably less important in terms of competition, rather the entire Bulgarian market

is more likely to be the appropriate market to consider.

The results for Romania are reported in table 4 and are very similar to the

results for Bulgaria, except that there is some hidden dynamics which needs to be

taken into account. In column (1) the OLS results suggest that foreign firms

outperform domestic ones, that domestic firms experience positive spillovers and that

foreign firms do not benefit from other foreign firms in their sector that much as

domestic ones. However, the second order serial correlation test suggests that the


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model is not correctly specified in terms of the dynamics. In addition, there may also

be an endogeneity problem related to some of the explanatory variables.

In column (2) of table 4 I therefore report the results using instruments for the

input factors and for the spillovers. The results of column (2) show no statistically

significant effects of spillovers and foreign ownership. However, again the

diagnostics suggest that the model is misspecified, i.e. the Sargan test of instrument

validity and the second order serial correlation test reject the model specification.

Column (3) therefore estimates a dynamic model, including the lagged dependent

variable as one of the regressors. Since the model is estimated in first differences, the

lagged dependent variable is also endogenous and therefore needs to be instrumented

too, using all available moment restrictions from t-2 backwards. In column (3) the

Sargan test accepts the model specification, the second order serial correlation test

could no longer be computed since one time observation is lost due to the lagged

dependent variable and the fact that the data for Romania only go from 1994 onwards,

rather than 1993. However, since the lagged dependent variable is statistically

significant, it is likely that this controls for the initial problem of second order serial

correlation. The results indicate that spillovers from foreign firms to domestic ones

are negative. The results in column (3) suggest that once properly controlled for the

dynamics in the model, again the same negative spillover effects show up. The

interaction effect between foreign firms and spillovers is no longer statistically

significant, just like foreign ownership in itself is no longer statistically significant.

This is consistent with the empirical literature that has shown that privatisation did not

lead to better firm performance and that it may take some time before firms start to

engage in restructuring.


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Finally, in column (4) I test for the presence of regional spillovers. As in

Bulgaria, I find no statistically significant effect of regional spillovers on domestic

firms.

Table 5 shows the results for Poland. Since I lost a lot of observations in the

estimation due to missing data on material costs, the Polish sample is much smaller

than the one used for Bulgaria and Romania, so the results for Poland need to be read

with caution. The first column gives the OLS results. I find a statistically significant

effect of foreign ownership on firm productivity performance. This contrasts with

Bulgaria and Romania where I found no effect of foreign ownership. In the case of

Poland, however, it may make sense that foreign firms outperform domestic ones

since Poland is in a more advanced stage of development towards a market economy.

If it takes time for firms to restructure then one may expect that in less developed

countries, such as Bulgaria and Romania, foreign firms do not outperform domestic

ones, while in the more advanced ones, such as Poland, the restructuring effects have

come through which is reflected in the positive effect of foreign ownership. In column

(1) I find no statistically significant effect of spillovers.

In column (2) I report the GMM IV estimates. The same results hold as in the

OLS case, i.e. foreign firms outperform domestic ones or to put it differently, a firm

that would change its ownership structure from 0% foreign participation to 100%

foreign participation, total factor productivity would increase by approximately 20%.

This result confirms the hypothesis that foreign firms or joint ventures have some

superior knowledge and/or technology which allows them to be more efficient than

their domestic counterparts. It is also consistent with the idea that foreign firms induce

restructuring at the firm level which leads to higher productivity (Wallner, 1998).


20

Again I find no statistically significant effect of spillovers. This may be due to

the fact that the “technological” positive externality and the negative competition

effect cancel eachother out, or, it may be due to the fact that there are no increasing

returns to scale which would imply that there is no declining average cost curve. The

latter makes sense, based on the estimates of the coefficients of the input factors.

Rather decreasing returns to scale seem to hold on average, with the only statistically

significant input factor being material costs. This is plausible as most firms in

transition countries are still characterised by over-manning levels and an outdated

capital stock. Moreover, since transition has started earlier in Poland than in Romania

and Bulgaria, the initial increase in competitive pressure at the start of transition was

experienced at an earlier stage, such that the competition effect in the case of Poland

is likely to be much lower than in the case of Bulgaria and Romania.

Finally, in column (3) I also test for the presence of regional spillovers.

However, the only significant effect I find is the material costs of production. Also

foreign ownership is no longer statistically significant at conventional levels. This is

most likely due to multicollinearity of the data, given that only 262 observations are

used in the estimation. For this reason I estimated the equation again, but leaving out

the interaction terms between foreign ownership and spillovers. In column (4) the

results are reported and show that as before foreign firms do better than domestic

ones. In addition, I find evidence of negative regional spillovers, albeit only

significant at the 10% level, but still no evidence of spillovers at the sectoral level.


21

IV. Conclusion

This paper studied the effects of direct foreign investment on the performance

of firms in three emerging market economies, Bulgaria, Romania and Poland. Two

main questions were addressed. First, do foreign firms perform better than their

domestic competitors and second, does foreign investment generate ‘spillovers’ to

local firms?

I find evidence that foreign firms do not perform better than domestic ones,

except in Poland, the more advanced transition economy. This suggests that it may

take time for ownership effects to have an effect on performance, due to lags in

restructuring. In addition, I find no evidence of positive spillovers, but rather negative

or no spillovers of foreign investment to domestic firms. This is rationalised through a

competition effect that dominates a technological spillover effect in Bulgaria and

Romania, which would hold under the assumption of increasing returns to scale

(declining average cost curves). The competition effect may dominate the technology

effect if the technology gap is too large, which would be the case in less advanced

countries such as Bulgaria and Romania.

The results in this paper suggest that in the early stages of transition, the stages

Bulgaria and Romania are in, the increased competition from DFI dominates

technological spillovers to domestic firms. It suggests that inefficient firms will loose

market share due to foreign competition, which in the long run should increase the

overall efficiency of an economy. In the latter stages, when domestic firms have

engaged in substantial restructuring and market competition has been established, the

dominating competition effect seems to vanish. Whether in the longer run


22

technological spillover effects start dominating, leading to positive spillovers is a

topic for future research when more years of data will become available.


23

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24

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25

Table 1: Summary Statistics (means of the 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 2 : Available instruments in GMM technique

Endogenous explanatory variable Available instruments1997 97ix∆ 939495 ,, iii xxx1996 96ix∆ 9394, ii xx1995 95ix∆ 93ixNote: x refers to any of the explanatory variables that is treated as endogenous.


26

Table 3: Results for BulgariaDependent variable: y

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

4,662 4,662 4,662

Notes: (i) all equations include time dummies, (ii) heteroscedastic consistent standarderrors in brackets, (iii) * denotes significant at the 5% level, ** at the 10% level, (iv)instruments include some or all available moment restrictions of the endogenousexplanatory variables as well as region dummies.


27

Table 4: Results for RomaniaDependent variable: y


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

10,955 10,955 7,111 7,111

Notes: as in table 3


28

Table 5: Results for PolandDependent variable: y


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

Notes: as in table 3

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No. 239: A Longitudinal Study of IJVPerformance in Eastern Europe

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No. 235: Does a Soft MacroeconomicEnvironment Induce Restructuring on theMicroeconomic Level during the TransitionPeriod? Evidence from Investment Behaviorof Czech Enterprises

Lubomír Lízal June 1999

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No. 233: Theories of Soft Budget Constraintsand the Analysis of Banking Crises

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Josef C. Brada, Arthur E. King, and Chia-Ying Ma

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No. 229: Back to the Future: The GrowthProspects of Transition EconomiesReconsidered

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No. 226: Unemployment Benefit Entitlementand Training Effects in Poland duringTransition

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Leslie Perlow January 1999

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Audra J. Bowlus and Terry Sicular January 1999

No. 218: Competing Strategies of FDI andTechnology Transfer to China: American andJapanese Firms

W. Mark Fruin and Penelope Prime January 1999

No. 217 Published in: Journal of ComparativeEconomics, “Returns to Mobility in theTransition to a Market Economy” Vol. 27, No.1, March 1999, pp. 4-

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No. 216 Published in: Journal of ComparativeEconomics, “Labor Market Policies andUnemployment in the Czech Republic.” Vol.27, No. 1, March 1999, pp. 33-60.

Katherine Terrell and Vit Sorm November 1998

No. 215 Published in: Journal of ComparativeEconomics, “Active Labor Market Policies inPoland: Human Capital Enhancement,Stigmatization or Benefit Churning?” Vol. 27,No. 1, March 1999, pp. 61-

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No. 212: The Marketing System in BulgarianLivestock Production – The Present State andEvolutionary Processes During the Period ofEconomic Transition

Yordan Staykov, Team Leader October 1998

No. 211: Bankruptcy Experience in Hungaryand the Czech Republic

Janet Mitchell October 1998

No 210: Values, Optimum Stimulation Levelsand Brand Loyalty: New Scales in NewPopulations

Steven M. Burgess and Mari Harris September 1998

No. 209: Inherited Wealth, Corporate Controland Economic Growth

Randall K. Morck, David A. Stangeland,and Bernard Yeung

September 1998

No. 208: A Cultural Analysis of HomosocialReproduction and Contesting Claims to

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Competence in Transitional FirmsNo. 207: From Survival to Success: TheJourney of Corporate Transformation at Haier.Forthcoming in Teaching the Dinosaurs toDance: Organizational Change in TransitionEconomies ed. Daniel Denison.

Arthur Yeung and Kenneth DeWoskin July 1998

No. 206: Why Do People Work If They AreNot Paid? An Example from Eastern Europe.Forthcoming in Teaching the Dinosaurs toDance: Organizational Change in TransitionEconomies ed. Daniel Denison.

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No. 205: Firm Ownership and WorkMotivation in Bulgaria and Hungary: AnEmpirical Study of the Transition in the Mid-1990s. Forthcoming in Teaching theDinosaurs to Dance: Organizational Change inTransition Economies ed. Daniel Denison.

Robert A. Roe, Irina L. Zinovieva,Elizabeth Dienes, and Laurens A. ten Horn

May 1998

No. 204: Human Resource Management in theRestructuring of Chinese Joint Ventures.Forthcoming in Teaching the Dinosaurs toDance: Organizational Change in TransitionEconomies ed. Daniel Denison.

Nandani Lynton April 1998

No. 203: Emergent Compensation Strategiesin Post-Socialist Poland: Understanding theCognitive Underpinnings of ManagementPractices in a Transition Economy.Forthcoming in Teaching the Dinosaurs toDance: Organizational Change in TransitionEconomies ed. Daniel Denison.

Marc Weinstein March 1998

No. 202: Corporate Transformation andOrganizational Learning: The People’sRepublic of China. Forthcoming in Teachingthe Dinosaurs to Dance: OrganizationalChange in Transition Economies ed. DanielDenison.

Meinolf Dierkes and Zhang Xinhua March 1998

No. 201: Foreign Direct Investment as aFactor of Change: The Case of Slovakia.Forthcoming in Teaching the Dinosaurs toDance: Organizational Change in TransitionEconomies ed. Daniel Denison.

Sonia Ferencikova February 1998

No. 200: Radical versus Incremental Change:The Role of Capabilities, Competition, andLeaders. Forthcoming in Teaching theDinosaurs to Dance: Organizational Change inTransition Economies ed. Daniel Denison.

Karen L. Newman February 1998

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Lisa A. Keister December 1997

No. 194: Japanese Investment in TransitionalEconomies: Characteristics and Performance.Forthcoming in Teaching the Dinosaurs toDance: Organizational Change in TransitionEconomies ed. Daniel Denison.

Paul W. Beamish and Andrew Delios November 1997

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Dr. Ivan Perlaki January 1998

No. 192: Russian Communitariansim: AnInvisible Fist in the Transformation Process ofRussia. Forthcoming in Teaching theDinosaurs to Dance: Organizational Change inTransition Economies ed. Daniel Denison.

Charalambos Vlachoutsicos July 1998

No. 191: Teaching the Dinosaurs to Dance Michal Cakrt September 1997No. 190: Strategic Restructuring: MakingCapitalism in Post-Communist EasternEurope. Forthcoming in Teaching theDinosaurs to Dance: Organizational Change inTransition Economies ed. Daniel Denison.

Lawrence P. King September 1997

No. 189: Published in: Regional Science andUrban Economics, “Russia’s Internal Border”,29 (5), September 1999.

Daniel Berkowitz and David N. DeJong July 1998

No. 187: Corporate Structure and Performancein Hungary

László Halpern and Gábor Kórsöi July 1998



No. 186: Performance of Czech Companies byOwnership Structure

Andrew Weiss and Georgiy Nikitin June 1998

No. 185: Firm Performance in Bulgaria andEstonia: The effects of competitive pressure,financial pressure and disorganisation

Jozef Konings July 1998

No. 184: Investment and Wages during theTransition: Evidence from Slovene Firms

Janez Prasnikar and Jan Svejnar July 1998

No. 183: Investment Portfolio under SoftBudget: Implications for Growth, Volatilityand Savings

Chongen Bai and Yijiang Wang July 1998

No. 181: Delegation and Delay in BankPrivatization

Loránd Ambrus-Lakatos and Ulrich Hege July 1998

No. 180: Financing Mechanisms and R&DInvestment

Haizhou Huang and Chenggang Xu July 1998

No. 179: Organizational Culture andEffectiveness: The Case of Foreign Firms inRussia

Carl F. Fey and Daniel R. Denison January 1999

No. 178: Output and UnemploymentDynamics in Transition

Vivek H. Dehejia and Douglas W. Dwyer January 1998

No. 177: Published in: Economics ofTransition,, “Bureaucracies in the RussianVoucher Privatization” Vol. 8, No. 1, 2000,pp. 37-57.

Guido Friebel June 1998

No. 176: Chronic Moderate Inflation inTransition: The Tale of Hungary

János Vincze June 1998

No. 175: Privatisation and Market Structure ina Transition Economy

John Bennett and James Maw June 1998

No. 174: Ownership and ManagerialCompetition: Employee, Customer, or OutsideOwnership

Patrick Bolton and Chenggang Xu June 1998

No. 173: Intragovernment Procurement ofLocal Public Good: A Theory ofDecentralization in NondemocraticGovernment

Chong-en Bai, Yu Pan and Yijiang Wang June 1998

No. 172: Political Instability and Growth inProprietary Economies

Jody Overland and Michael Spagat August 1998

No. 171: Published in Post-CommunistEconomies, “Framework Issues in thePrivatization Strategies of the Czech Republic,Hungary, and Poland” Vol. 11, no. 1 March1999.

Morris Bornstein June 1998

No. 170: Published in: European Journal ofPolitical Economy “Privatization, OwnershipStructure and Transparency: How to Measurea Real Involvement of the State” 15(4),November 1999, pp. 605-18.

Frantisek Turnovec May 1998

No. 169 Published in: American EconomicReview, “Unemployment and the SocialSafety Net during Transitions to a MarketEconomy: Evidence from Czech and SlovakMen.” Vol. 88, No. 5, Dec. 1998, pp. 1117-1142.

John C. Ham, Jan Svejnar, and KatherineTerrell

December 1998



No. 167: Voucher Privatization withInvestment Funds: An Institutional Analysis

David Ellerman March 1998

No. 166: Published in: Marketing Issues inTransitional Economies, “Value Priorities andConsumer Behavior in a TransitionalEconomy: The Case of South Africa” ed.Rajeev Batra.

Steven M. Burgess and Jan-Benedict E.M.Steenkamp

August 1998

No. 164: Finance and Investment inTransition: Czech Enterprises, 1993-1994

Ronald Anderson and Chantal Kegels September 1997

No. 163: European Union Trade andInvestment Flows U-Shaping IndustrialOutput in Central and Eastern Europe: Theoryand Evidence

Alexander Repkine and Patrick P. Walsh April 1998

No. 162: Skill Acquisition and Private FirmCreation in Transition Economies

Zuzana Brixiova and Wenli Li October 1999

No. 161: Corruption in Transition Susanto Basu and David D. Li May 1998No. 160a: Tenures that Shook the World:Worker Turnover in Russia, Poland andBritain

Hartmut Lehmann and JonathanWadsworth

November 1999

No. 160: Tenures that Shook the World:Worker Turnover in the Russian Federationand Poland

Hartmut Lehmann and JonathanWadsworth

June 1998

No. 159: Does Market Structure Matter? NewEvidence from Russia

Annette N. Brown and J. David Brown June 1998

No. 158: Structural Adjustment and RegionalLong Term Unemployment in Poland

Hartmut Lehmann and Patrick P. Walsh June 1997

No. 157: Baby Boom or Bust? ChangingFertility in Post-Communist Czech Republicand Slovakia

Robert S. Chase April 1998

No. 156 Published in: Leadership andOrganization Development Journal, “LeadingRadical Change in Transition Economies.”Vol. 19, No. 6, 1998, pp. 309-324.

Karen L. Newman June 1998

No. 155 Published in: Oxford Review ofEconomic Policy, “From Theory intoPractice? Restructuring and Dynamism inTransition Economies.” Vol. 13, No. 2,Summer 1997, pp. 77-105.

Wendy Carlin and Michael Landesmann June 1997

No. 154: The Model and the Reality:Assessment of Vietnamese SOE Reform—Implementation at the Firm Level

Edmund Malesky, Vu Thanh Hung, VuThi Dieu Anh, and Nancy K. Napier

July 1998

No. 153 Published in: Journal of ComparativeEconomics, “Causes of the Soft BudgetConstraint: Evidence on Three Explanations.”Vol. 26, No. 1, March 1998, pp. 104-116.

David D. Li and Minsong Liang March 1998

No. 152 Published in: Comparative EconomicStudies, “Enterprise Restructuring in Russia’sTransition Economy: Formal and InformalMechanisms.” Vol. 40, No. 2, Summer 1998,pp. 5-52.

Susan J. Linz and Gary Krueger April 1998

No. 151: Labor Productivity in Transition: ARegional Analysis of Russian Industry

Susan J. Linz May 1998



No. 150: Tax Avoidance and the Allocation ofCredit. Forthcoming in Financial Systems inTransition: The Design of Financial Systemsin Central Europe eds. Anna Meyendorff andAnjan Thakor.

Anna Meyendorff June 1998

No. 149: Commitment, Versatility andBalance: Determinants of Work TimeStandards and Norms in a Multi-CountryStudy of Software Engineers

Leslie Perlow and Ron Fortgang April 1998

No. 148: Changes in Poland’s TransferPayments in the 1990s: the Fate of Pensioners

Bozena Leven June 1998

No. 147: Environmental Protection andEconomic Development: The Case of theHuaihe River Basin Cleanup Plan

Robert Letovsky, Reze Ramazani, andDebra Murphy

June 1998

No. 146: Chief Executive CompensationDuring Early Transition: Further Evidencefrom Bulgaria

Derek C. Jones, Takao Kato, and JeffreyMiller

June 1998

No. 145 Published in: Economics ofTransition, “Women’s Unemployment Duringthe Transition: Evidence from Czech andSlovak Micro Data,” Vol. 7, No. 1, May 1999,pp. 47-78.

John Ham, Jan Svejnar, and KatherineTerrell

May 1998

No. 144: Investment and Wages in Slovenia Janez Prasnikar May 1998No. 143 Published in: Review of FinancialStudies, “Optimal Bankruptcy Laws AcrossDifferent Economic Systems,” 12(2), Summer1999, pgs. 347-77.

Elazar Berkovitch and Ronen Israel March 1998

No. 142: Industrial Policy and Poverty inTransition Economies: Two Steps Forward orOne Step Back?

Susan J. Linz March 1998

No. 141: Collective Ownership andPrivatization of China’s Village Enterprises

Suwen Pan and Albert Park April 1998

No. 140: A Comparative Look at LaborMobility in the Czech Republic: Where haveall the Workers Gone?

Vit Sorm and Katherine Terrell April 1999

No. 139: The Failure of the Government-LedProgram of Corporate Reorganization inRomania

Simeon Djankov and Kosali Ilayperuma September 1997

No. 138: Ownership and Employment inRussian Industry: 1992-1995

Susan J. Linz March 1998

No. 137 Published in: Journal of PoliticalEconomy, “Reform Without Losers: AnInterpretation of China’s Dual-TrackApproach to Transition,” Feb. 2000; Vol. 108,Iss.1; pg. 120

Lawrence J. Lau, Yingyi Qian, and GerardRoland

November 1997

No. 136 Published in: European EconomicReview, “The Political Economy of MassPrivatization and the Risk of Expropriation,”44(2), February 2000, pgs. 393-421

Klaus M. Schmidt March 1998

No. 135: Radical Organizational Change: TheRole of Starting Conditions, Competition, andLeaders

Karen L. Newman January 1998



No. 134: To Restructure or Not to Restructure:Informal Activities and Enterprise Behavior inTransition

Clifford Gaddy and Barry W. Ickes May 1998

No. 133: Management 101: Behavior of Firmsin Transition Economies

Josef C. Brada March 1998

No. 132 Published in: Quarterly Journal ofEconomics, “Interfirm Relationships andInformal Credit in Vietnam,” 114(4), Nov.1999, pgs. 1285-1320

John McMillan and Christopher Woodruff February 1998

No. 131 Published in: Comparative EconomicStudies, “Will Restructuring HungarianCompanies Innovate? An Investigation Basedon Joseph Berliner’s Analysis of Innovation inSoviet Industry.” Vol. 40, No. 2, Summer1998, pp. 53-74.

John B. Bonin and Istvan Abel March 1998

No. 130: Published in The AmericanEconomic Review, “Changing Incentives ofthe Chinese Bureaucracy.” May, 1998.

David D. Li January 1998

No. 129: Restructuring Investment inTransition: A Model of the EnterpriseDecision

Richard E. Ericson January 1998

No. 128 Published in: Comparative EconomicStudies, “Job Rights in Russian Firms:Endangered or Extinct Institutions?” Vol. 40,No. 4, Winter 1998, pp. 1-32.

Susan J. Linz January 1998

No. 127: Accounting for Growth in Post-Soviet Russia

Daniel Berkowitz and David N. DeJong January 1998

No. 126 Published in: Economics ofTransition, “From Federalism, Chinese Style,to Privatization Chinese Style,” 7(1), 1999,pgs. 103-31

Yuanzheng Cao, Yingyi Qian, and BarryR. Weingast

December 1997

No. 125: Market Discipline in ConglomerateBanks: Is an Internal Allocation of Cost ofCapital Necessary as Incentive Device?Forthcoming in Financial Systems inTransition: The Design of Financial Systemsin Central Europe eds. Anna Meyendorff andAnjan Thakor.

Arnoud W. A. Boot and Anjolein Schmeits November 1997

No. 124: Financial Discipline in the EnterpriseSector in Transition Countries: How DoesChina Compare?

Shumei Gao and Mark E. Schaffer February 1998

No. 123: Considerations of an EmergingMarketplace: Managers’ Perceptions in theSouthern African Economic Community

Brent Chrite and David Hudson February 1998

No. 122: A Model of the Informal Economy inTransition Economies

Simon Commander and AndreiTolstopiatenko

November 1997

No. 121: Local Labour Market Dynamics inthe Czech and Slovak Republics

Peter Huber and Andreas Worgotter November 1997

No. 119: Institutional Upheaval and CompanyTransformation in Emerging MarketEconomies

Karen L. Newman March 1998

No. 118: Industrial Decline and Labor John S. Earle October 1997



Reallocation in RomaniaNo. 117: Notes for an Essay on the SoftBudget Constraint

Lorand Ambrus-Lakatos January 1997

No. 116: Labor Demand During Transition inHungary

Gabor Korosi October 1997

No. 115: Enterprise Performance andManagers’ Profiles

Simeon Djankov and Stijn Claessens December 1997

No. 114b Employment and Wages inEnterprises under Communism and inTransition: Evidence From Central Europe andRussia

Swati Basu, Saul Estrin, and Jan Svejnar April 2000

No. 114: Employment and Wage Behavior ofEnterprises in Transitional Economies

Swati Basu, Saul Estrin, and Jan Svejnar October 1997

No. 113: Preliminary Evidence on ActiveLabor Programs’ Impact in Hungary andPoland

Christopher J. O’Leary October 1997

No. 111: Unemployment Benefits andIncentives in Hungary: New Evidence

Joachim Wolff October 1997

No. 110: Published in: Empirical Economics,“Long-Term Unemployment, UnemploymentBenefits and Social Assistance: The PolishExperience” Empirical-Economics; 23(1-2),1998, pages 55-85.

Marek Gora and Christoph M. Schmidt April 1997

No. 109 Published in: Industrial and LaborRelations Review, “Markets for CommunistHuman Capital: Returns to Education andExperience in Post-Communist CzechRepublic and Slovakia.” Vol. 51, No. 3, April1998, pp. 401-423.

Robert S. Chase October 1997

No. 107: The Worker-Firm Matching in theTransition: (Why) Are the Czechs MoreSuccessful Than Others?

Daniel Münich, Jan Svejnar, and KatherineTerrell

October 1997

No. 106 Published in: Journal of ComparativeEconomics, “Job Creation, Job Destructionand Growth of Newly Established, Privatizedand State-Owned Enterprises in TransitionEconomies: Survey Evidence from Bulgaria,Hungary, and Romania,” Vol. 26, No.3,September 1998, pp. 429-445.

Valentijn Bilsen and Jozef Konings September 1998

No. 105: Getting Behind the East-West[German] Wage Differential: Theory andEvidence

Michael Burda and Christoph Schmidt May 1997

No. 104: The Birth of the “Wage Curve” inHungary, 1989-95

Gabor Kertesi and Janos Kollo October 1997

No. 103: Published in: Journal of ComparativeEconomics, “Grime and Punishment: JobInsecurity and Wage Arrears in the RussianFederation” 27, 595-617 (1999).

Hartmut Lehmann, Jonathan Wadsworth,and Alessandro Acquisti

October 1997

No. 102: Social Networks in Transition Lorena Barberia, Simon Johnson, andDaniel Kaufmann

October 1997

No. 101: Depreciation and Russian CorporateFinance: A Pragmatic Approach to Surviving

Susan J. Linz November 1997



the TransitionNo. 100: Romanian Financial System Reform Anna Meyendorff and Anjan V. Thakor November 1997No. 99: Proceedings of the Conference onStrategic Alliances in Transitional Economies,held May 20, 1997 at the Davidson Institute

Edited by Cynthia Koch May 1997

No. 98: Institutions, Strain and theUnderground Economy

Daniel Daianu and Lucian Albu November 1997

No. 97: Structure and Strain in ExplainingInter-Enterprise Arrears

Daniel Daianu November 1997

No. 96: Resource Misallocation and Strain:Explaining Shocks in Post-CommandEconomies

Daniel Daianu November 1997

No. 95: Published in: Finance-a-Uver, “CzechMoney Market: Emerging Links AmongInterest Rates.” 48(2) 1998 pp. 99-109.

Jan Hanousek and Evzen Kocenda November 1997

No. 94: Pre-Reform Industry and theState Monopsony in China

Xiao-Yuan Dong and Louis Putterman October 1997

No. 93: China’s State-Owned EnterprisesIn the First Reform Decade:An Analysis of a Declining Monopsony

Xiao-Yuan Dong and Louis Putterman October 1997

No. 92: Expatriate Management in the CzechRepublic

Richard B. Peterson September 1997

No. 91: China and the Idea of EconomicReform

Thomas G. Rawski April 1997

No. 90 Published in: China Economic Review,“China’s State Enterprise Reform: AnOverseas Perspective.” Vol. 8, Spring 1997,pp. 89-98.

Thomas G. Rawski July 1997

No. 89: The Economic Determinants ofInternal Migration Flows in Russia DuringTransition

Annette N. Brown July 1997

No. 88: Gender Wage Gaps in China’s LaborMarket: Size, Structure, Trends

Margaret Maurer-Fazio, Thomas G.Rawski, and Wei Zhang

July 1997

No. 87: Privatisation in Central and EasternEurope

Saul Estrin June 1997

No. 86: Published in : Economics ofTransition, “The Effect of Privatization onWealth Distribution in Russia.” v. 7, no. 2,1999, pp. 449-65

Michael Alexeev February 1998

No. 85: Was Privatization in Eastern Germanya Special Case? Some Lessons from theTreuhand

Uwe Siegmund September 1997

No. 84: Start-ups and Transition Daniel M. Berkowitz and David J. Cooper September 1997No. 83: Which Enterprises (Believe They)Have Soft Budgets after Mass Privatization?Evidence from Mongolia

James Anderson, Georges Korsun, andPeter Murrell

October 1997

No. 82: Published in: European EconomicReview, “Unemployment Dynamics and theRestructuring of the Slovak UnemploymentBenefit System.” April, 1997.

Martina Lubyova and Jan C. van Ours June 1997

No. 81: Determinants of UnemploymentDuration in Russia

Mark C. Foley August 1997



No. 80: The Many Faces of InformationDisclosure

Arnoud W.A. Boot and Anjan V. Thakor October 1997

No. 79: Published in: Journal of Finance,“Foreign Speculators and Emerging EquityMarkets.”v.22, iss. 2, 2000, pp. 565-613

Geert Bekaert and Campbell R. Harvey August 1997

No. 78: The Relationship Between EconomicFactors and Equity Markets in Central Europe

Jan Hanousek and Randall K. Filer June 1997

No. 77 Published in: Economics of Transition,“A Gini Decomposition Analysis of Inequalityin the Czech and Slovak Republics During theTransition,” Vol. 6, No.1, May 1998, pp. 23-46.

Thesia I. Garner and Katherine Terrell May 1998

No. 76: China’s Emerging Market for PropertyRights: Theoretical and EmpiricalPerspectives

Gary H. Jefferson and Thomas G. Rawski June 1997

No. 75b: Test of Permanent IncomeHypothesis on Czech Voucher Privatization

Jan Hanousek and Zdenek Tima October 1997

No. 74: Determinants of Performance ofManufacturing Firms in Seven EuropeanTransition Economies

Stijn Claessens, Simeon Djankov, andGerhard Pohl

February 1997

No. 73 Published in: Economics of Transition,“The Restructuring of Large Firms in SlovakRepublic.” Vol. 6, No. 1, May 1998, pp. 67-85

Simeon Djankov and Gerhard Pohl May 1998

No. 72: Law, Relationships, and PrivateEnforcement: Transactional Strategies ofRussian Enterprises

Kathryn Hendley, Peter Murrell, and RandiRyterman

November 1998

No. 71: Giving Credit Where Credit Is Due:The Changing Role of Rural FinancialInstitutions in China

Albert Park, Loren Brandt, and John Giles March 1997

No. 70: Privatization Versus Competition:Changing Enterprise Behavior in Russia

John S. Earle and Saul Estrin Spring 1997

No. 69: Russian Managers under Storm:Explicit Reality and Implicit LeadershipTheories (A Pilot Exploration)

Igor Gurkov October 1998

No. 68: The Political Economy of Central-Local Relations in China: Inflation andInvestment Controls During the Reform Era

Yasheng Huang Spring 1997

No. 67: Between Two Coordination Failures:Automotive Industrial Policy in China with aComparison to Korea

Yasheng Huang Spring 1997

No. 66 Published in: Post-Soviet Geographyand Economics, “Red Executives in Russia’sTransition Economy.” Vol. 27, No. 10,November 1996, pp. 633-651.

Susan J. Linz January 1997

No. 65 Published in: Industrial and CorporateChange, “On the Sequencing of Privatizationin Transition Economies.” Vol. 7, No. 1,1998.

Gautam Ahuja and Sumit K. Majumdar April 1997

No. 64: Published in: Journal of Law andEconomics, “Foreign Ownership andProfitability: Property Rights, Control and the

Pradeep K. Chhibber and Sumit K.Majumdar

April 1997



Performance of Firms in Indian Industry”42(1), April 1999, pp. 209-38.No. 63: How Taxing Is Corruption onInternational Investors?

Shang-Jin Wei February 1997

No. 62: What Can We Learn from theExperience of Transitional Economies withLabour Market Policies?

Tito Boeri 1997

No. 61: Published in: AccountingOrganizations and Society, “EconomicTransition, Strategy and the Evolution ofManagement Accounting Practices: The Caseof India” 24(5,6), Jul/Aug 1999, pp. 379-412.

Shannon W. Anderson and William N.Lanen

April 1997

No. 60a: Enterprise Investment During theTransition: Evidence from Czech Panel Data

Lubomír Lizal and Jan Svejnar December 1997

No. 59: Published in: Journal of Law,Economics, and Organization, “InstitutionalEnvironment, Community Government, andCorporate Governance: UnderstandingChina’s Township-Village Enterprises.” 14(1),April 1998, pages 1-23

Jiahua Che and Yingyi Qian April 1997

No. 58: From the Grabbing Hand to theHelping Hand

Jiahua Che June 2000

No. 57: Published in: Brookings Papers onEconomic Activity, “The Unofficial Economyin Transition.” 1: 1998.

Simon Johnson, Daniel Kaufmann, andAndrei Schleifer

June 1997

No. 56: Taxes and Government Incentives:Eastern Europe vs. China

Roger H. Gordon and David D. Li April 1997

No. 55: Corruption and Reform Susanto Basu and David Li June 1996No. 54: Decentralization and theMacroeconomic Consequences ofCommitment to State-Owned Firms

Loren Brandt and Xiaodong Zhu June 1997

No. 53: Published in: The InternationalJournal of Industrial Organization,“Competitive Shocks and Industrial Structure:The Case of Polish Manufacturing.” August,1999. .

Pankaj Ghemawat and Robert E. Kennedy May 1997

No. 52: Published in: The Quarterly Journal ofEconomics, “Insecure Property Rights andGovernment Ownership of Firms.” May,1998.

Jiahua Che and Yingyi Qian May 1997

No. 51: Incentives, Scale Economies, andOrganizational Form

Eric Maskin, Yingyi Qian, and ChenggangXu

May 1997

No. 50: Published in: Post-Soviet-Affairs,“End of the Tunnel? The Effects of FinancialStabilization in Russia” April-June 1997,pages 105-33

Barry W. Ickes, Peter Murrell, and RandiRyterman

March 1997

No. 49: The Evolution of Bank Credit Qualityin Transition: Theory and Evidence fromRomania

Enrico C. Perotti and Octavian Carare October 1996

No. 48: Where Do the Leaders Trade?Information Revelation and InteractionsBetween the Segments of Czech Capital

Jan Hanousek and Libor Nemecek May 1997



MarketsNo. 47: Firms’ Heterogeneity in Transition:Evidence from a Polish Panel Data Set

Irena Grosfeld and Jean-François Nivet May 1997

No. 46: Strategic Creditor Passivity,Regulation, and Bank Bailouts

Janet Mitchell May 1997

No. 45a: Published in: Journal of PublicEconomics, “Tax Rights in TransitionEconomies: A Tragedy of the Commons.” 76,2000, pp. 369-397

Daniel M. Berkowitz and Wei Li September 1997

No. 44a: The Information Content of StockMarkets: Why do Emerging Markets haveSynchronous Stock Price Movements?(forthcoming in the Journal of FinancialEconomics).

Randall Morck, Bernard Yeung, andWayne Yu

February 1999

No. 43: Agency in Project Screening andTermination Decisions: Why Is Good MoneyThrown After Bad?

Chong-en Bai and Yijiang Wang May 1997

No. 42: Published in: Economics ofTransition, “Channels of Redistribution:Inequality and Poverty in the RussianTransition.” Vol. 7 (2) 1999.

Simon Commander, AndreiTolstopiatenko, and Ruslan Yemtsov

May 1997

No. 41: Published in: Economics ofTransition, “Labour Market Characteristicsand Profitability: Econometric Analysis ofHungarian Exporting Firms, 1986-1995” 6(1),May 1998, pages 145-62

László Halpern and Gabor Korosi May 1997

No. 40: Published in: the Harvard LawReview, “The Tragedy of the Anticommons:Property in the Transition from Marx toMarkets.” January 1998.

Michael Heller February 1997

No. 39: Privatization and ManagerialEfficiency

Olivier Debande and Guido Friebel May 1997

No. 38 Published in: The Quarterly Journal ofEconomics, “Disorganization.” Vol. 112, No.4, November 1997, pp. 1091-1126.

Olivier Blanchard and Michael Kremer January 1997

No. 37: Published in: Economics ofTransition, “Transition and the Output Fall.”7(1), 1999, pages 1-28.

Gérard Roland and Thierry Verdier March 1997

No. 36: Restructuring an Industry DuringTransition: A Two-Period Model

Richard Ericson September 1996

No. 34: The East-West Joint Venture: BCTorsion Case Study

Sonia Ferencikova and Vern Terpstra December 1998

No. 33 Published in: Journal of ComparativeEconomics, “Quantifying Price Liberalizationin Russia.” Vol. 26, No. 4, December 1998,pp. 735-737.

Daniel Berkowitz, David DeJong, andSteven Husted

December 1998

No. 32: What Can North Korea Learn fromChina’s Market Reforms?

John McMillan September 1996

No. 31: Published in : China-Economic-Review, “Towards a Model of China as aPartially Reformed Developing EconomyUnder a Semifederalist Government.” , 9(1),

Yijiang Wang and Chun Chang March 1997



Spring 1998, pages 1-23.No. 30: Convergence in Output in TransitionEconomies: Central and Eastern Europe,1970-1995

Saul Estrin and Giovanni Urga February 1997

No. 29: Published in: Economics ofTransition, “Altered Band and ExchangeVolatility.” Volume 6, no. 1, 1998, 173-181.

Evzen Kocenda March 1997

No. 28: Published in: Quarterly Journal ofEconomics, “Public Versus Private Ownershipof Firms: Evidence from Rural China.”Volume 113, no. 3, August 1998, 773-808.

Hehui Jin and Yingyi Qian January 1997

No. 27: East-West Joint Ventures in aTransitional Economy: The Case of Slovakia

Sonia Ferencikova March 1997

No. 26: Published in Economic Analysis“Behavior of a Slovenian Firm in Transition”Vol. 1, no. 1, 1998, 57-73.

Janez Prasnikar February 1997

No. 25: Cultural Encounters and Claims toExpertise in Postcommunist Capitalism

Michael D. Kennedy February 1997

No. 24: ZVU a.s.: Investment Funds on theBoard of Directors of an Engineering Giant

Tory Wolff August 1995

No. 23: The Role of Investment Funds in theCzech Republic (joint publication with CzechManagement Center)

Dusan Triska June 1996

No. 22: Czech Investment Fund Industry:Development and Behaviour (joint publicationwith Czech Management Center)

Richard Podpiera May 1996

No. 21: Restructuring of Czech Firms: AnExample of Gama, a.s. (joint publication withCzech Management Center)

Antonin Bulin June 1996

No. 20: YSE Funds: A Story of CzechInvestment Funds (joint publication withCzech Management Center)

Michal Otradovec November 1995

No. 19: První Investicni a.s., The FirstInvestment Corporation (joint publicationwith Czech Management Center)

Jaroslav Jirasek August 1995

No. 18: PPF a.s., The First Private InvestmentFund (joint publication with CzechManagement Center)

Michal Otradovec November 1995

No. 17 Published in: Post-Soviet Geographyand Economics, “Russia’s Managers inTransition: Pilferers or Paladins?” Vol. 37,o.7 (September 1996), pp. 397-426.

Susan J. Linz and Gary Krueger November 1996

No. 16: Banks in Transition—InvestmentOpportunities in Central Europe and RussiaEdited Transcript from 31 May 1996Conference in New York City

With commentary and edited by AnnaMeyendorff

January 1997

No. 15: Marketing in Transitional Economies:Edited Transcript & Papers from 1 April 1996Conference in Ann Arbor, Michigan

Compiled by The Davidson Institute December 1996

No. 14: Pensions in the Former Soviet Bloc:Problems and Solutions. Published byCouncil on Foreign Relations. “The Coming

Jan Svejnar November 1996



Global Pension Crisis” New York, 1997No. 13: Enterprise Restructuring andPerformance in the Transition. Forthcomingin Financial Systems in Transition: TheDesign of Financial Systems in CentralEurope eds. Anna Meyendorff and AnjanThakor.

Lubomir Lizal, Miroslav Singer, and JanSvejnar

December 1996

No. 12 Published in: Journal of InternationalMarketing, “Executive Insights: MarketingIssues and Challenges in TransitionalEconomies.” Vol. 5, No. 4, 1997, pp. 95-114.Also published in: Marketing Issues inTransitional Economies ed. Rajeev Batra.

Rajeev Batra April 1997

No. 11: Worker Trust and SystemVulnerability in the Transition from Socialismto Capitalism

Andrew Schotter August 1996

No. 10 Published in: Comparative EconomicStudies, “Russian Firms in Transition:Champions, Challengers, and Chaff.” Vol. 39,No.2, Summer 1997, pp. 1-36.

Susan J. Linz July 1996

No. 9: Corporate Debt Crisis and BankruptcyLaw During the Transition: The Case of China

David D. Li and Shan Li December 1995

No. 8 Published in: Journal of ComparativeEconomics, “A Theory of AmbiguousProperty Rights in Transition Economies: TheCase of the Chinese Non-State Sector.” Vol.23, No. 1, August 1996, pp. 1-19.

David D. Li June 1996

No. 7: The Foreign Economic Contract Law ofChina: Cases and Analysis

Dong-lai Li June 1993

No. 3: Bank Privatization in Hungary and theMagyar Kulkereskedelmi Bank Transaction

Roger Kormendi and Karen Schnatterly May 1996

Replacing Nos. 1-2 & 4-6: Journal ofComparative Economics Symposium on“Bank Privatization in Central Europe andRussia.” Vol. 25, No. 1, August 1997.

No. 1 “Bank Privatization in TransitionalEconomies” by Roger Kormendi andEdward Snyder. No. 2 “TransactionalStructures of Bank Privatizations inCentral Europe and Russia” by AnnaMeyendorff and Edward A. Snyder. No. 4“Bank Privatization in Poland: The Case ofBank Slaski” by Jeffery Abarbaness andJohn Bonin. No. 5 “Bank Privatization inPost-Communist Russia: The Case ofZhilsotsbank” by Jeffery Abarbanell andAnna Meyendorff and No. 6 “”The CzechRepublic’s Commercial Bank: KomercniBanka” by Edward A. Snyder and RogerC. Kormendi.

August 1997

the effect of direct foreign investment on domestic firms

Documents