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Does Foreign Ownership Matter? Russian Experience: 

Does Foreign Ownership Matter? Russian Experience K. Yudaeva, K.Kozlov, N.Melentieva, N.Ponomareva.

Theoretical considerations: 

Theoretical considerations FDI can be more efficient than domestic firms because they have better technology. Domestic policy and lack of knowledge of local traditions may negatively affect foreign firm productivity Intra-industry spillovers: Positive: technological spillovers, managerial practices, incentives to restructure Negative: downsizing of domestic firms due to competition

Literature on Transition Countries: 

Literature on Transition Countries Direct effect Djankov and Murrell (2000) : foreign-owned companies are more effective than companies in other types of ownership Intra-industry Spillover effects Djankov and Hoekman (2000), Kinoshita (2001), Konings (2001), Javorcik and Spatareanu (2004) and Damijan et al (2003) – negative spillovers in Czech Republic, Bulgaria, Romania and Poland; Several authors found positive spillovers in Romania. Zukovska-Gagelmann (2001): negative effect for most productive foreign firms and positive effect for less productive foreign firms in Poland. Backward linkages: Javorcik (forthcoming): positive backward linkages

FDI in Russia: 

FDI in Russia

Policy Toward FDI: 

Policy Toward FDI Late 1980s: Law “On joint ventures with firms from capitalist countries”. Fully-owned firms not allowed July 1991: Law “On foreign investment” fully-owned firms allowed Limitations for participation in privatization: “strategic industries”. Decisions on firms with less than 200 employees were taken on the regional level December 1995: Law “On production sharing agreements”. Became active only since 1999, but later on was changed so that it is not used anymore. Other problems nowadays: strategic industries

Comparison with other countries: 

Comparison with other countries Average net FDI inflows n % of GDP in 1998-2002: China 4% Czech Republic 10% India 0.6% Hungary 3% Kazakhstan 9% Poland 4% Slovenia 2% Ukraine 2% Gross FDI inflow in Russia in 1998 were 0.4% GDP 2003 were 1.6%.GDP

Inter-Country Comparison: 

Inter-Country Comparison Average per capita FDI inflow in 1994-1998: Russia: $17 Hungary: $220 Czech Republic: $134


Data Russian Enterprise Registry 1993-1997: large and medium firms Registry of foreign owned firms 1993-1997 Firm level data Information on the share of foreign owner Consider firms with more than 10% of foreign share as foreign-owned

Breakdown of Foreign Firms by Sector in 1997:: 

Breakdown of Foreign Firms by Sector in 1997: 49% - industry 29% - trade 10% - transportation and communication <4% - construction <4% - housing

Some basic facts about FDI (1997): 

Some basic facts about FDI (1997) Major Investors: USA (27.4%), Germany (10.8%), UK (9%), Switzerland (7.3%), Cyprus (5.5%), Ireland (5.5%), Canada (4.4%) 65% of FDI are more than 50% foreign-owned Most attractive regions: Moscow and oblast, Tyumen, St.Petersburg, Tula, Komi, Vologda, Krasnodarsky kray, Tatarstan. Least attractive regions Altai Republic, Jewish Autonomous Okrug, Dagestan, Karachaevo-Cherkessiya

Comparison of productivity between FDI and domestic firms: 

Comparison of productivity between FDI and domestic firms Methodology: Problems: No history before foreign investments are made. Foreign share rarely changes. Very bad data on capital of foreign-owned firms. Have good data only for 1996=> cross section estimations Foreign ownership maybe endogenous. Treatment effect procedure with regional dummies as instruments.

Major result: FDI are 2.7 times more productive: 

Major result: FDI are 2.7 times more productive

Further results:: 

Further results: No significant difference between productivity of foreign firms with different shares of foreign ownership No significant differences in efficiency between foreign firms with different size.

Does regional human capital affect FDI Productivity? - No: 

Does regional human capital affect FDI Productivity? - No Education level is the percentage of adults with secondary education in the region

Does regional policies affect FDI productivity - yes: 

Does regional policies affect FDI productivity - yes Reform index is the weighted average of the degree of regulation of food prices, proportion of goods and services with regulated prices, share of private enterprisers in trade catering and other household services, growth in the number of small businesses, the number of small businesses per capita. All for 1996

Spillover effects: methodology: 

Spillover effects: methodology Production function estimation only for domestic firms Time and firm specific fixed effect Intra-industry spillovers: share of foreign-owned firms in industry output Regional spillovers: share of foreign firms in total output of industry in the region Upstream and downstream spillovers: industry spillovers weighted by input-output matrices.

Result: positive inter-industry spillover : 

Result: positive inter-industry spillover This result is robust: using lagged spillovers or instrumentation with lagged spillover effect does not change the result.

Effect of education and reforms: 

Effect of education and reforms Weak evidence that education level in the regions enhances spillover effect. This result is not robust to using lagged spillovers. However, when lagged spillovers are used, effect of reforms becomes positive, but insignificant.

Major lessons from Russian experience from early years of transition: 

Major lessons from Russian experience from early years of transition FDI are much more productive than domestic firms. In fact, in Russia the difference is much more pronounced than in CEE countries FDI can have positive intra-industry spillover effect. Supplementing FDI policies with other policies, which improve business climate, is essential not only in order to attract more FDI, but to attract better FDI. Spillovers can be higher in countries with better education level. By improving education level countries may increase overall positive effect from attracting FDI.

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