PO.TicY RE.SFARCH WORKING PAPER 21 _15_

# Summary findinigs

Firm-lcvel data for the Czech Republic (1992-96) suggest that foreign investment had a positive ilmpact on recipient firms' total factor productivity (TFP) growth, This result is robust to corrections for the sampleselection bias that orevails because foreign investment tends to go to firms with above-average productivity perfornmance.

This result is not surprising, given the presumption that foreign investors transfer new technologies and knowiedge to partner fir;ns. With some lag, this is likely to be reflected in greater TFP growth.

Foreign direct investment appears to have a greater impact on TFP growth than joint ventures, suggesting that parent firms are transferring more know-how (soft or hard) to affiliates than joint venture firms get from their partners.

Joint ventures and foreign direct investment together appear to have a negative spillover effect on firms that do not have foreign partnerships. This effect is relatively large and statistically significant. But if the focus is restricted to the impact of foreign-owned affiliates (foreign direct investrment) on all other firms in an industry, the magnitude of the negative effect becomes much smaller and loses statistical significance.

Thlis result, together with the fact that joint ventures and foreign direct investment together account for significant shares of total output in many industries, suggests that more research is needed to determine how much knowledge diffuses frorn firms with strong links to foreign firms to firms that do no, have such links. Especially important is the extent of spillovers amnong joint venture firms and benteen foreign affiliates and firms with joint ventures.

Insofar as joint venture firms invest more in technological capacity (as suggested by their training efforts), those firms could be expected to be better able to absorb and benefit from the diffusion of know-how. The absence of such capacity nmay underlie the observed negative spillover effect on other firms in the industry. Longer time series and collection of data on variables that measure firms' in-house technological effort would help identify the magnitude and determinants of technological spillovers.

- - This paper a product of the Financial Economics Group is part of a larger effort in the group to understand the transition process in the Czech Republic Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Rose Vo, room MC9-622, telephone 202-473-3722, fax 202-522-2031, Internet address hvol ,worldbank.org. Policy ResearchWorking Papers are also posted on the Web at http:,'f/vvwwv.worldbank.org/ html/dec/Publications/'Workpapers/home.html. The authors may be contacted at sdjankov(o.worldbank.org or bhoekman(a =.w>orldbank.org. Mav 1999. (24 pages)

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