Spillovers of technology transfer from FDI: the case of Estonia

Foreign Direct Investment (FDI) is expected to generate technology spillovers to indigenous firms in transition economies. This paper disentangles the positive effect of technology transfer on the productivity of domestic firms from that of competition. We use a production function framework to estimate the impact of technology transfer from FDI on the growth of sales of domestic firms in Estonia during the period from 1994 to 1999. Employing panel data techniques, we control for industry and firm specific effects and use a Heckman two-stage procedure to control for sample self-selection bias. We find that the magnitude of the spillover effect depends on the characteristics of incoming FDI and of the recipient local firm. More specifically, spillovers vary with the measure of foreign presence used and are influenced by the recipient firm's size, its ownership structure, and its trade orientation. (C) 2004 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.