Inward Foreign Direct Investment and Industrial Restructuring : Micro Evidence - The Slovenian Firms’ Growth Model

We examine the impact of inward foreign direct investment (FDI) on the growth of local firms in terms of employment and total factor productivity (TFP) for the Slovenian manufacturing sector in the 1994-2003 period. The theoretically predicted channels through which inward FDI affects the firm dynamics in a host country prove to be in general significant. First, there is evidence of the direct impact of foreign firms through so-called direct technology transfer as foreign-owned firms have higher growth of TFP compared to domestically-owned firms after controlling for other determinants. Secondly, the entry of foreign firms stimulates the re-shuffling of the resources from less to more efficient local firms. The firm selection process is, namely, characterised by the least efficient firms experiencing a drop in their employment growth upon a foreign firm’s entry. Thirdly, regarding the productivity spillover effects from foreign to local firms we provide indirect evidence that they mostly operate through vertical linkages rather than within the same industry. In general, it seems that not all firms are equally able to benefit from foreign firms’ presence and that absorptive capacity plays an important role