R&D and Technology Spillovers via FDI: Innovation and Absorptive

R&D and Technology Spillovers via FDI: Innovation andAbsorptive Capacity

By: Yuko Kinoshita

Working Paper Number 349November 2000

R&D and technology spillovers via FDI:Innovation and absorptive capacity

Yuko Kinoshita ∗

CERGE-EI, CEPR and WDI�

November 2000

Abstract

Two faces of R&D (innovation and learning) and technology spilloversfrom FDI (foreign direct investment) on a Þrm�s productivity growthare examined in this paper.Using Þrm-level panel data on Czech manufacturing Þrms between

1995 and 1998, I Þnd that:(i) the learning effect of R&D is far more important than the in-

novative effect in explaining the productivity growth of a Þrm,(ii) there is no evidence of technology spillovers to local Þrms from

having a foreign joint venture partner,(iii) positive spillovers from FDI are found in electrical machinery

and radio&TV sectors, which are also active investors in innovativeR&D.

∗Correspondence: [email protected]. I thank Jan Kmenta, Jan Svejnar,Bernard Yeung, Kresimir Zigic and participants at CEPR/WDI Annual Conference onTransition Economies in Moscow for comments and Murali Parsa at the Czech StatisticalOffice for providing the data.

�William Davidson Institute, University of Michigan Business School

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1 Introduction

The accumulation of knowledge is one of the key determinants for the eco-nomic growth of a country. The stock of knowledge or technology can beincreased by deliberate investment in R&D capital or by the diffusion of ex-isting technology. Innovations generated by R&D activities and technologyspillovers from the stock of knowledge are both important in enhancing Þrms�productivity as well as being closely related to each other.This paper studies the effects of both R&D investment and technol-

ogy spillovers from foreign direct investment (FDI) on a Þrm�s productivitygrowth. I pay special attention to �the two faces of R&D��innovation and�absorptive� or �learning� capacity�as Cohen and Levinthal (1989) propose.That is, R&D not only stimulates innovation but also develops the Þrm�sability to identify, assimilate, and exploit outside knowledge. This secondrole of R&D is considered to be very important particularly for assessing theextent of technology spillovers from others. Technology diffusion is not anautomatic consequence from the presence of others� knowledge stock. It alsorequires that the recipient possesses the ability to absorb and adopt the tech-nology and that R&D activities will help increase the incidence of technologyspillovers by enhancing the Þrm�s absorptive capacity.In this study, R&D affects the productivity growth of Þrms via two chan-

nels. First, it directly increases the technology level by adding more newinformation (innovation). Second, R&D increases the absorptive capacityof the Þrm and induces a greater extent of technology spillovers indirectly.The empirical set-up for this study is drawn from Griffith, Redding, and VanReenen (2000). They examine the two roles of R&D in explaining the pro-ductivity convergence of 13 OECD countries at the industry level. They Þndinnovative and absorptive R&D equally important.The other branch of the literature I draw upon is technology spillovers

though FDI. Among many channels of technology diffusion1, FDI is one ofthe most important vehicles2 because FDI can transfer technology embodied

1International trade is another important avenue for international technology diffusion.[Grossman and Helpman (1991), Coe and Helpman (1995), and Keller (1997)] Technologyis also transmitted via reading and exchanging scientiÞc journals or commercially obtainedby licensing agreements. [Eaton and Kortum (1996)]

2There are four channels through which technology spills over from foreign to lo-cal Þrms: (1) demonstration-imitation effects, (2) competition effects, (3) foreign link-

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in human capital which would not be transferred otherwise3. Also in thetheoretical literature of technology transfer from foreign to domestic Þrms,Wang and Blomstrom (1992) point to the importance of the learning effortsor the absorptive capacity of host country Þrms in increasing the rate oftechnology transfer.In the empirical studies of technology diffusion via FDI, the evidence is

rather mixed despite its premise of potential gains from FDI particularly atthe Þrm- and plant-levels. For example, Haddad and Harrison (1993) andBlomstrom and Sjoholm (1999) Þnd no evidence of technology spillovers atboth Þrm and industry level for Moroccan and Indonesian manufacturingÞrms, respectively. Djankov and Hoekman (1998) report similar results forCzech manufacturing and non-manufacturing Þrms. In the Venezuelan man-ufacturing sector, however, Aitken and Harrison (1999) show that there arebeneÞts of foreign investment but they are captured by foreign joint venturesbut not by foreign presence in the industry. These contradictory Þndingssuggest that the incidence of technology spillovers may be dependent on theinitial level of technology of local Þrms relative to that of foreign Þrms. Kokko(1994) conÞrms this point from his results on Mexican manufacturing Þrmsby stating that the incidence of technology spillovers are conditional on thetechnology level of local Þrms relative to that of foreign Þrms.In this study, I explicitly introduce R&D investment as a part of the

learning efforts by the host country Þrm. The empirical set-up in this studyis manufacturing Þrms operating in the Czech Republic between 1995 and1998. Total factor productivity (TFP) growth of these Þrms is determined bythree factors: R&D, FDI, and the Þrm�s absorptive capacity. I Þnd that: (i)the learning effect of R&D is far more important than the innovative effectin explaining the productivity growth of a Þrm; (ii) there is no evidenceof technology spillovers from having a foreign joint venture partner to localÞrms; and (iii) positive spillovers from FDI are found in electrical machineryand radio&TV sectors, which are also active investors in innovative R&D.This paper is organized as follows. In the next section, empirical speciÞca-

tions are discussed in light of the theoretical literature. In section 3, the dataand summary statistics are described and regression results are examined in

age effects, and (4) training effects. See Kokko (1992) and Kinoshita (1999) for furtherdiscussion.

3MansÞeld (1980) reports that FDI conveys newer technology than trade.

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section 4. Finally, section 5 concludes my Þndings.

2 Framework

2.1 R&D and productivity growth

Suppose the production function of Þrm i is expressed as:

Yit = AitLαitK

1−αit (1)

where Yit is value-added, Ait is total factor productivity (TFP) or Solowresidual, Lit is labor input, and Kit is physical capital stock. Ait is relatedto R&D capital stock as follows:

Ait = BitRρit (2)

where Rit is the stock of R&D capital and Bit is other factors that inßu-ence TFP. Rit can be considered as a Þrm�s intangible assets and thus it isunobservable. It is accumulated over time by investments in knowledge andtechnology.Time-differentiating equation (2), I get:

4AitAit

=4BitBit

+ ρ4RitRit

(3)

where ρ is the elasticity of value-added with respect to R&D capital stock. Inorder to estimate the series of R&D capital stock directly, I need additionalassumptions. Following Griliches (1980), Nadiri (1980), and Goto and Suzuki(1989), the evolution of R&D capital stock over time can be described asfollows (the i th subscript is dropped):

Rt =nXk=1

µkEt−k + (1− δ)Rt−1 (4)

That is, R&D capital stock at time t is the sum of all past R&D expenditures{Et−k} and depreciated R&D capital at time t-1 where µk is a distributedlag and δ is a rate of obsolescence of R&D capital. For the Þrst term in(4), I need to specify the lag structure. (e.g. R&D expenditures in time t-τ

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constitute the increase in R&D capital at time t.) In the literature, peopleoften use the average lag τ and µk = 1 if k = τ and µk = 0 if k 6= τ. (4) thenbecomes:

Rt = Et−τ + (1− δ)Rt−1 (5)

The rate of obsolescence of R&D capital, δ, is somewhat similar to therate of depreciation of physical capital. The main difference is, however, thatR&D capital also depreciates as knowledge diffuses to people other than theinnovator. The estimation of δ requires some information on patent renewaldata.4 In the absence of patent renewal data, it is not possible to estimatea series of R&D capital stock directly. One way to derive the rate of returnon R&D investment without estimating the rate of obsolescence is to assumethat δ is small enough. If δ is computed as an inverse of the length of timea patent generates royalty revenue as in Goto and Suzuki (1989), then I amimplicitly assuming that the average life span of patents is long enough.5 Theother conventional way to avoid the estimation of the rate of obsolescence isto set δ to a plausible level, say, 10% as some researchers do. In this paper,I choose the Þrst approach to compute the rate of return to R&D capital.6

Assuming that δ is small and that the average lag is one year (τ = 1) in(5), I get:

4RtRt

=EtRt

(6)

The substitution of (6) into (3) yields:

4AitAit

=4BitBit

+ ηEitYit

(7)

where η is marginal product of R&D or the rate of return on R&Dinvestment.7

4One can compute the net proÞt of a patent as a discounted sum of the revenue from apatent (royalty) minus the patent renewal fee. See Bosworth (1978), Pakes and Shanker-man (1984), and Goto and Suzuki (1989) for more details.

5This is true for industries that are not so technology-intensive.6Griliches and Mairesse (1984) and Griffith, Redding, and van Reenen (2000) use this

approach as well. Hall and Mairesse (1995) report that the choice of depreciation rate forR&D capital makes little difference to R&D elasticity estimates in the study of Frenchmanufacturing Þrms.

7ρ = ∂Y∂R · RY by deÞnition and ρ4RR = ∂Y

∂R · RY · ER = ηEY .

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2.2 Technology spillovers from FDI and productivitygrowth

Another focus of this analysis is FDI as an engine of the productivity growthof a Þrm. Foreign investment can be considered here as the inßow of advancedknowledge from foreign Þrms. In particular, among many channels throughwhich foreign knowledge spills over to a country, FDI is one of the mosteffective forms of international technology transfer because FDI can conveynot only technology embodied in goods and services but also intangible assetssuch as managerial skills that would not be transferred through other avenues.At the Þrm level, local Þrms in the host country can beneÞt from FDI

via roughly four channels.8 First, foreign technology embodied in FDI canbe transferred from foreign to local Þrms as local Þrms imitate what foreignÞrms do. Firms invest abroad in order to exploit Þrm-speciÞc capabilities andthey are thus typically characterized as efficient Þrms that possess intangibleassets. Second, the productivity growth of local Þrms may be affected bycompetitive pressures due to the entry of efficient foreign Þrms. Third, bypurchasing intermediate inputs from foreign suppliers or by selling output toforeign producers of Þnal goods, local Þrms may be able to produce outputwith a higher standard or be forced to use more efficient technology, respec-tively. Finally, foreign Þrms may engage in training workers in local Þrmsespecially when they are joint venture partners.It is, however, difficult to distinguish one from the other since the mecha-

nism of technology spillovers from FDI is complex and often interdependent.Nevertheless, within the limitation of available data, I use two variables thatreßect the degree of technology spillovers through FDI in the current empir-ical set-up.The Þrst variable is the foreign ownership dummy FORGNit at time t.

The past studies often use this variable as a proxy for intra-Þrm technologyspillovers from FDI. FORGNit is 1 if shares owned by foreign Þrms are equalto or greater than 50% and 0 otherwise.9 According to this classiÞcation,

8See Kokko (1992) and Kinoshita (1999) for further discussion.9The cut-off level of foreign shares used in many studies at the Þrm level is usually

5% or 10%. This deÞnition of 50% or greater is given by the Czech Statistical Officein the question on ownership structure. The effect of foreign ownership on productivitygrowth may be underestimated due to the difference in deÞnitions of foreign ownership incomparison with the existing studies.

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I deÞne only Þrms with foreign majority shares as foreign-owned Þrms (e.g.Þrms with FORGNit = 1).The second variable is FORj(i)t,which proxies foreign presence in the sec-

tor measured as the share of employment by foreign-owned Þrms to totalemployment within the industry. Namely, FORj(i)t denotes sectoral foreignstock at time t in the j th industry to which the i th Þrm belongs. This vari-able is considered to reßect the degree of intra-industry technology spilloversfrom FDI.These two variables are incorporated into 4Bit

Bit.

4BitBit

= µ1FORGNit + µ2FORj(i)t + dj + dt (8)

where dj is a sectoral dummy and dt is a year dummy to control for cross-sectional and time-series differences. Substituting (8) into (7), I get:

4AitAit

= ηEitYit+ µ1FORGNit + µ2FORj(i)t + dj + dt (9)

η, µ1, and µ2 are expected to be positive and signiÞcant if they raise aÞrm�s productivity. Alternatively, I can also run the following regression toget the estimates for the variables of our interest:

4YitYit

= α0 + α4LitLit

+ (1− α)4Kit

Kit

+ ηEitYit

+µ1FORGNit + µ2FORj(i)t + dj + dt + εit (10)

It should be noted that this is closely related to the speciÞcation thatHaddad and Harrison (1993) and Aitkin and Harrison (1999) use in theirstudies of manufacturing Þrms in Morocco and Venezuela, respectively. Thenovelty of this model is that I include R&D investment in the effort level oflocal Þrms to increase the stock of knowledge.R&D is directly related to TFP growth in the above speciÞcation. R&D

may also affect the extent of technology spillovers from FDI by increasing aÞrm�s capacity to absorb new technology more effectively. Griffith, Redding,and Van Reenen (2000) distinguish the two faces of R&D�innovation andenhancement of absorptive capacity�and analyze both roles of R&D empir-ically on productivity growth of industries in OECD countries. They indeed

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Þnd evidence that R&D not only stimulates innovation but also facilitatesthe imitation of others� discoveries.The current study also addresses this issue by relating R&D to the size

of technology spillovers. That is, the R&D variable affects via two channels.One is through a direct channel (η) and the other is through the absorptivecapacity (µ1 and µ2).

10 Equation (10) is extended into the following form:

4YitYit

= α0 + α4LitLit

+ (1− α)4Kit

Kit+ η

EitYit+ µ1FORGNit + µ2FORj(i)t

+µ3(EitYit)FORGNit + µ4(

EitYit)FORj(i)t + dj + dt + εit (11)

3 Data

Two data sets are used for this study. Both data sets are collected by theCzech Statistical Office. The Þrst data set is the quarterly data that wascompiled from Þrms� balance sheets and income statements from the Þrstquarter of 1993 through the last quarter of 1998. Most of the variablesnecessary for the estimation were drawn from this data set.The second data set is the annual survey on R&D and licenses. Since

R&D expenditures are reported by Þrms annually from 1995 through 1998,the quarterly Þrm-level data was merged into the annual level and then thetwo data sets were merged according to the Þrm identiÞer and year. Finally,the panel data for 1995-1998 has 1217 observations.11

Table 1 shows the annual average of two key variables, R&D propensityand foreign presence , for each sector. R&D propensity is deÞned as a ratio ofR&D expenditure to value-added and foreign presence is measured as a ratioof employment by foreign-owned Þrms to total employment in the sector.Foreign presence varies greatly across sectors. Three sectors that attract

much FDI are motor vehicle, rubber, and electrical machinery12. Basic metal

10Note that the degree of technology spillovers in Griffith, Redding and Van Reenen(2000) is deÞned as the distance from technology frontier or the catch-up effect to theleading-edge technology. Kinoshita (1999) uses the initial difference in technlogy level asthe degree of technology transfer.

11Computing TFP growth rates, the number of observations drops to 704.12Notable examples include Volkswagen (German) in motor vehicle, Continental (Ger-

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and other transport equipment receive the least FDI in our sample Þrms.R&D propensity also varies but to a lesser degree. Other transport equip-ment, radio&TV, and motor vehicle exhibit higher R&D propensity thanother sectors.Note that there is no clear correlation between R&D propensity and for-

eign presence. If R&D propensity implies a level of technological complexityin the sector, then FDI in the Czech Republic is not necessarily going intolow-tech sectors with low R&D intensity. Motor vehicle is an exception sinceit is relatively more R&D intensive and receives a lot of FDI as well.

3.1 Comparisons between foreign and local firms

A premise of this study is that foreign Þrms are more technologically ad-vanced than local Þrms. As technology spills over from foreign to local Þrms,local Þrms adopt the new methods of production or management resultingin higher productivity.The Þrst two columns in table 2 report the average TFP levels computed

for each sector and ownership classiÞcation (local and foreign Þrms). In manysectors, I observe higher productivity levels for foreign Þrms. The exceptionsare textile, chemical, machinery, medical equipment, and other transportequipment. As table 1 indicates, textile, machinery, and other transportequipment have very little foreign presence and the average of foreign Þrmsmay not be treated as representative due to too few observations. However,foreign presence is large enough and accounts for 11% in both chemical andmedical equipment sectors. In these two sectors, foreign Þrms are relativelyless efficient than local Þrms. This Þnding goes against the premise of thesuperiority of foreign technology. One explanation for this is that local Þrmshad already caught up in technology and surpassed foreign Þrms prior to1995.The last column in table 2 shows the differences by sector between the

average TFP growth rates for foreign Þrms and that for local Þrms. Positivenumbers imply that foreign Þrms grew faster than local counterparts onaverage. Negative numbers imply that local Þrms grew faster than foreign

man) in rubber& plastic, and Matsushita (Japanese) and Siemens (German) in electricalmachinery.

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Table 1: Annual average of R&D to value-added and foreign employmentshare by sector (1995-1998)

R&D / Y Foreign employment share

food 0.10 0.20textile 0.03 0.05wood & paper 0.06 0.10chemical 0.13 0.11rubber & plastic 0.15 0.31non-metallic mineral 0.19 0.21basic metal 0.05 0.02fabricated metal 0.08 0.13machinery 0.20 0.05electrical machinery 0.10 0.29radio&TV 0.37 0.23medical equipment 0.15 0.11motor vehicle 0.22 0.46other transport equipment 0.38 0.02other manufacturing 0.06 0.11ALL 0.16 0.14

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Þrms on average. There is no observation for foreign Þrms in some sectorsand in these sectors the TFP growth difference is not available.The picture here looks different from what I saw in TFP level compar-

isons. Foreign Þrms do not necessarily grow faster than local Þrms on av-erage. Combining the information on growth rate with the information onproductivity levels, there are four categories in which I can classify sectors.In the Þrst group ( food, non-metallic mineral, and other manufacturing),

foreign Þrms are more productive and also continue to grow faster than localÞrms. In the second group (electrical machinery and radio&TV), foreignÞrms are more productive but local Þrms are catching up with them. Onthe contrary, in the third group (textile), local Þrms are more productive butforeign Þrms are catching up. Finally, in the last group (chemical, machinery,medical equipment, and other transport equipment), local Þrms are moreproductive and grow faster than foreign counterparts. For the remainingsectors, there is no difference in TFP growth between foreign and local Þrms,or, the Þgure is not available due to lack of foreign observations. I will notdiscuss these non-grouped sectors here.The most interesting case is the second group. In electrical machinery

and radio&TV, the superiority of foreign technology is observed and so isthe presence of technological catch-up by local Þrms. There seem to beindeed some positive productive spillovers to local Þrms from FDI in thiscase. On the other hand, in the Þrst group (food, non-metallic mineral,and other manufacturing), local Þrms failed to beneÞt from the presence offoreign advanced technology. Finally, in the last two groups, the absence ofthe technological superiority of foreign Þrms is simply interpreted as a lackof enough information due to little foreign presence in these sectors.In the next section, I attempt to examine various factors that made a

difference between domestic Þrms in the Þrst and second groups in whetheror not they caught up with foreign Þrms.

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Table 2: Average TFP levels and TFP growth differences by sector andownership(1995-1998)

TFP level TFP growth differenceLocal Þrms Foreign Þrms

food 0 0.30 0.04textile �0.03 �0.17 0.03wood & paper 0.02 0.36 �chemical 0.16 0.05 -0.03rubber & plastic -0.12 0.34 0non-metallic mineral 0.12 0.38 0.02basic metal 0.07 0.76 �fabricated metal 0.04 0.34 0machinery -0.10 -0.11 -0.01electrical machinery 0.07 0.22 -0.01radio&TV -0.12 1.06 -0.04medical equipment -0.05 -0.36 -0.09motor vehicle -0.17 0.40 0other transport equipment -0.01 -1.70 -0.17other manufacturing -0.04 0.22 0.02ALL -0.02 0.19 0

Notes:

(1) TFP level = lnV A− αk lnK − αl lnL.(2) TFP growth difference = (average TFP growth rate)foreign− (average TFP growth rate)domestic.

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4 Estimation Results

Table 3 presents the results of OLS regressions with innovative R&D and twoforeign variables. The dependent variable is ln Yit

Yit−1. The coefficient of R&D

measures the a direct impact of R&D investment on productivity growth andI call it here innovative R&D as opposed to absorptive R&D. The coefficientof R&D is also the rate of return to R&D investment. All regressions includethe intercept and the changes of capital and labor.FORGN and FOR are the variables that represent spillovers within the

Þrm and within the industry, respectively. FORGN is a foreign ownershipdummy and, if foreign joint venture has any effect on productivity growth, Iwould expect it to be positive. This variable reßects the demonstration effectand possibly includes the linkage and training effects of technology spilloversfrom FDI.13 FOR is a proxy for foreign presence in the industry measuredas the employment share of foreign Þrms to that of all Þrms in the industryand mainly reßects demonstration and competition effects.Column I reports the result without sector dummies. The rate of return

to R&D investment is 0.031 at 1% level of signiÞcance. This implies that onemore unit of R&D, in this case, one more CZK spent on R&D will lead to anincrease of output by 3.1%. Thus, R&D investment indeed contributes to thegeneration of new knowledge but the rate of return is lower than that in thestudies done in other countries.14 The signiÞcance of R&D remains robustthroughout regressions in table 1 after including sector and time dummies.The results for foreign variables are somewhat disappointing. FORGN

carries a negative sign throughout regressions, although not statistically sig-niÞcant. The effect of FOR is positive as I expected. But the size of thecoefficient is lessened as I control for sector and time differences.15

A glance at table 3 indicates that there is no evidence of technologyspillovers from FDI once I include the Þrm�s R&D investment in the model.Since table 1 shows that average foreign Þrms are not actively engagingin R&D activities, there may be some substitutability between R&D andFORGN.

13See footnote 2 on page 1.14Goto and Suzuki (1989) report that the rate of return on R&D for Japanese manu-

facturing Þrms is about 30%.15Year dummies are added as proxies for changes of aggregate economic and political

environments in column III. However, they are jointly rejected in the model.

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Table 3: Innovative R&D and FDI

I II III

R&D/Y .031∗∗∗ .033∗∗∗ .033∗∗∗

(.007) (.008) (.008)FORGN -.006 -.007 -.007

(.007) (.007) (.007)FOR .030 .023 .026

(.019) (.045) (.060)

sector dummies no yes yestime dummies no no yesN 704 704 704adjusted R2 .1709 .1734 .1713

Notes:

(1) Dependent variable = Change in log of value-added.

(2) Intercept, changes in capital and labor are included in regressions

but is not reported here.

(3) Parentheses are standard errors. ∗∗∗,∗∗, and ∗indicate 1%, 5%and 10% signiÞcance levels, respectively.

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The limited impact of foreign investment is reported by other authors inÞrm- and plant-level studies. Using two variables similar to FORGN andFOR, Haddad and Harrison (1993) Þnd no positive effects of these variableson productivity growth. Aitken and Harrison (1999) Þnd a positive effectof the foreign joint venture variable but a negative effect of foreign stock inthe industry. Kokko (1994) examines the effect of foreign presence withinthe industry on labor productivity and concludes that technology spilloversare found only in sectors in which technology gaps between foreign and localÞrms are not too large. More recently, Blomstrom and Sjoholm (1999) drawsa similar conclusion and Þnds that technology spillovers were restricted tonon-exporting local Þrms.There are a few studies on the effects of FDI in transition countries.

Djankov and Hoekman (1998) use the Czech data with coverage of manu-facturing and non-manufacturing Þrms and also Þnd no spillovers from FDI.Rather, imports seem to be the driving force of productivity growth of theseÞrms. Konings (2000) in a study of Poland, Bulgaria, and Romania reportsthat there are even negative spillovers from FDI in some cases.All these studies point to the fact that technology spillovers from FDI are

not at all automatic consequences from the mere presence of foreign Þrms.If there are any spillovers present, then they are conditional on some factorsendogenous to the recipient Þrms or industries in the host economy.Now I introduce �absorptive R&D� interacted with both foreign spillover

variables. In the Þrst column in table 4, the interaction of R&D withFORGN is added. Innovative R&D remains signiÞcant and, interestinglyenough, R&D*FORGN shows the negative and signiÞcant sign. As I deducedfrom table 1, R&D and FORGN are substitutes in explaining productivitygrowth. In light of absorptive capacity, R&D does not help increase technol-ogy spillovers from foreign ownership but rather decreases the degree of suchspillovers.On the other hand, absorptive R&D becomes more dominant than innov-

ative R&D in column II when I add instead the interaction term R&D*FOR.Thus, R&D helps increase the degree of intraindustry spillovers from FDIsigniÞcantly. Innovative R&D is no longer signiÞcant once I account forthis type of absorptive capacity. If I deÞne absorptive or learning R&D asR&D that develops the Þrm�s ability to imitate and exploit outside knowl-edge, then R&D*FOR may capture the notion of absorptive capacity more

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appropriately. Since the investor in R&D is identical to that with foreignownership, the distinction between R&D and R&D*FORGN is less obvious.I Þnd in table 4 that the role of R&D in increasing absorptive capacity is

much greater than the conventional role of innovation. Only when the Þrmperforms R&D actively are there positive spillovers from foreign presence inthe industry. Borensztein, De Gregorio, and Lee (1998) in the study of FDIand economic growth draws a conclusion consistent with the current result.In their study, FDI is found to have a positive effect on economic growthonly when it is interacted with the level of human capital in the country.The level of human capital is a proxy for absorptive capacity of the recipientcountry. In the present paper, R&D is used in place of human capital.

I divide the sample by ownership into local and foreign Þrms in table5. The result from table 4 still holds for local Þrms. Innovative R&D isoutweighed by absorptive R&D via spillovers from foreign presence in theindustry. On the other hand, R&D plays no important role for productivitygrowth of foreign Þrms. Rather, foreign Þrms increase their productivity frompositive externalities from other foreign Þrms in the same industry. Suchpositive externalities are recognized when there are sharable inputs withinthe industry. For example, foreign Þrms can hire skilled workers alreadytrained by other foreign Þrms through labor turnover. This also conÞrms theagglomeration economies of foreign investors in certain sectors such as motorvehicles, electrical machinery, and rubber&plastic in the Czech Republic.

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Table 4: Innovative and absorptive R&D and FDI

I II III

R&D/Y .036∗∗∗ .008 .010(.008) (.011) (.011)

FORGN .002 -.005 .004(.008) (.007) (.008)

FOR .025 -.019 -.018(.045) (.047) (.047)

(R&D/Y)×FORGN -.088∗ � -.094∗∗

(.044) (.044)(R&D/Y)×FOR � .233∗∗∗ .240∗∗∗

(.079) (.079)

sector dummies yes yes yestime dummies no no noN 704 704 704adjusted R2 .1768 .1825 .1865

Notes:


(2) Intercept, changes in capital and labor are included in regressions

but are not reported here.

(3) Parentheses are standard errors. ∗∗∗,∗∗, and ∗indicate 1%, 5%and 10% signiÞcance levels, respectively.

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Table 5: Local and foreign Þrms

Local Þrms Foreign Þrms

R&D/Y .007 .008(.011) (.063)

FOR -.025 .131∗∗

(.080) (.064)(R&D/Y)*FOR .247∗∗∗ -.256

(.080) (.389)

time dummies no noN 643 61adjusted R2 .1783 .3084

Notes:


(2) Intercept and changes of capital and labor are included

in regressions.

(3) Parentheses are standard errors. ∗∗ and ∗indicate 5%and 10% signiÞcance levels, respectively.

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Table 6: Non-oligopolistic and oligopolistic sectors

non-oligopolistic sectors oligopolistic sectors

R&D/Y -.030∗∗ .038∗∗∗

(.013) (.012)FORGN -.019 .006

(.012) (.019)FOR -.044 .156∗

(.068) (.087)sector dummies no notime dummies no noN 84 69adjusted R2 .2367 .1023

Notes:


(2) Intercept and changes of capital and labor are included

in regressions.

(3) Parentheses are standard errors. ∗∗ and ∗indicate 5%and 10% signiÞcance levels, respectively.

(4) Non-oligopolistic sectors=food, non-metallic mineral, others;

Oligopolistic sectors=electrical machinery, radio&TV.

Sectoral differences introduced as Þxed effects are not jointly signiÞcant.Nevertheless, the distribution of foreign Þrms as well as R&D propensityacross sectors is uneven as seen in table 1. In table 6, I pay special attentionto sectors with a relatively large foreign presence. The two groups of sectorsI will focus on are based on the observation from table 2. The Þrst groupof sectors are those in which foreign Þrms exhibit higher efficiency, yet lo-cal Þrms fail to catch up with them. Food, non-metallic mineral, and othermanufacturing are included in the Þrst group, also called as non-oligopolisticsectors. The second group is oligopolistic sectors which include electricalmachinery and radio&TV. In these sectors, foreign Þrms show higher pro-ductivity and local Þrms succeed in catching up with them. In both groups,

18

there exist foreign Þrms equipped with superior technology. But what madethe difference in the outcome of local Þrms� productivity?The answer to this question can be found easily in table 6. For group 2

in column II, R&D investment has a substantial contribution to productivitygrowth. Technology spillovers from foreign stock in the industry are presentand the size of the coefficient is large. For group 1, the rate of return to R&Dis even negative and there are naturally no spillovers.For local Þrms to narrow the technology gap, foreign presence alone is not

enough to guarantee the incidence of technology spillovers. Simultaneous ef-forts to build up their skill base in the form of R&D investment is a necessarycondition for technology spillovers from FDI in the sector. And electrical ma-chinery and radio&TV present successful examples. Despite the substantialamount of foreign investment made in the sectors, food, non-metallic mineraland others did not receive spillovers partly because they did not engage inR&D activities.This result is consistent with the theoretical predictions made by other

authors. The interactions between Þrms in R&D activities are often de-scribed in a oligopolistic model. Muniagurria and Singh (1997) show thattechnology spillovers from a more advanced foreign Þrm to the home Þrm arerealized only when the home Þrm conducts its own R&D. In a similar vein,Kamien and Zang (2000) argue that a Þrm has to enter the R&D race byengaging in R&D, Þrst of all, in order to beneÞt from spillovers from rivalÞrms in research joint venture. It is natural to assume that these strategicincentives are stronger in an oligopolistic market such as electrical machineryand radio&TV than food, non-metallic, and others.

5 Conclusion

Using unpublished Þrm-level data on the Czech manufacturing sector be-tween 1995 and 1998, I examined the importance of the Þrm�s R&D andtechnology diffusion from FDI in explaining productivity growth. In theanalysis, I distinguish the two roles of R&D: innovation and increasing theabsorptive capacity.The annual rate of return on R&D investment for pooled samples is es-

timated as roughly around 3%. Once I include the learning effect of R&Dinvestment in the model, the direct effect of R&D on productivity growth

19

becomes insigniÞcant. Both foreign joint venture (FORGN) and foreign pres-ence in the sector (FOR) are found to have no signiÞcant effect on the growthof productivity. But only when FOR is interacted with R&D does it have apositive and signiÞcant effect. This implies that the indirect effect of R&Dvia the development of the absorptive capacity is far more important thanthe direct effect of innovative R&D in increasing productivity growth of theÞrm, and that R&D and intraindustry spillovers from FDI go hand in hand.The other important Þnding is that the rate of technology spillovers from

FDI varies greatly across sectors. In oligopolistic sectors such as electricalmachinery and radio&TV, there exists a signiÞcant rate of spillovers fromhaving a large foreign presence. Also, R&D investment has a higher rate ofreturn in these sectors. On the other hand, less oligopolistic sectors suchas food and non-metallic mineral show no evidence of spillovers despite thelarge presence of foreign investors in these sectors.Based on these results, several policy implications can be drawn. First,

for the host country to maximize the degree of technology spillovers fromFDI, the home country Þrms should engage in R&D investment in order toenhance their absorptive capacity. Thus, R&D subsidies or tax breaks shouldbe accompanied by the promotion of foreign investment. Second, it may bebeneÞcial for the host government to target oligopolistic industries to attractFDI because the beneÞts of spillovers will be greater provided that domesticindustries possess competitiveness in research activities.

20

Appendix. Data descriptionThe Þrst source of the data used in this study is the Þrm-level survey

data drawn from quarterly balance sheets and income statements (6430 ob-servations). The second source is annual R&D data that consists of 1175observations. After merging the two by Þrm identiÞer and year and countingonly those that are in both data sets, the number of observations drops to995. Excluding those without ownership information and industry classiÞca-tion, it drops further to 919. The combined data contains the information oncapital stock, capital investment, number of employees by type, total sales,output, value-added, deßators, ownership classiÞcation, and R&D expendi-tures.Firms with foreign ownership are either wholly or partly foreign-owned.

The rest of the Þrms are deÞned as locally-owned Þrms. Among local Þrms,the majority is privately-owned Þrms. During the period of 1995-1997, therewere few changes in ownership classiÞcation among sample Þrms.According to the 2-digit ISIC, there are 15 sectors: (15) food & tobacco,

(17) textile, apparel & leather, (20) paper, pulp, wood & petroleum, (24)chemical, (25) rubber & plastic, (26) non-metallic mineral, (27) basic metal,(28) fabricated metal, (29) machinery and office machinery, (31) electricalmachinery, (32) radio, TV & communication equipment, (33) medical equip-ment & watches, (34) motor vehicle, (35) other transportation equipment,and (36) furniture & others. Parentheses are the original 2-digit OKECnumbers.The dependent variable in main regressions is the annual growth rate of

value-added. I do not use output, even though it is available, because costsof materials and energy are not available.The value of Þxed assets is reported in company balance sheets. However,

due to the revaluation of Þxed assets at the beginning of each year, it tendsto be overvalued. Instead, I use �depreciated capital� reported in incomestatements for a proxy of capital stock. 16 For the labor variable, the numberof total employees is used.

16Djankov and Hoekman(1998) use energy comsuption for capital utilization. However,the Þgures on energy are not available in the data.

21

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24

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No. 216 Published in: Journal of Comparative Economics, “LaborMarket Policies and Unemployment in the Czech Republic.” 27(1), Mar1999, pp. 33-60.

Katherine Terrell and Vit Sorm Nov. 1998

No. 215 Published in: Journal of Comparative Economics, “ActiveLabor Market Policies in Poland: Human Capital Enhancement,Stigmatization or Benefit Churning?” 27(1), Mar 1999, pp. 61- .

Jochen Kluve, Hartmut Lehmann,and Christoph M. Schmidt

Dec. 1998

No. 214 Published in: Journal of Comparative Economics, “Does theSlovenian Public Work Program Increase Participants' Chances to Finda Job?” 27(1), Mar 1999, pp. 113- .

Milan Vodopivec Dec. 1998


No. 213 Published in: Journal of Comparative Economics, “Effects ofActive Labor Market Programs on the Transition Rate fromUnemployment into Regular Jobs in the Slovak Republic.” 27(1), Mar1999, pp. 90- .

Martina Lubyova and Jan C. vanOurs

Dec. 1998

No. 212: The Marketing System in Bulgarian Livestock Production –The Present State and Evolutionary Processes During the Period ofEconomic Transition

Yordan Staykov, Team Leader Oct. 1998

No. 211: Bankruptcy Experience in Hungary and the Czech Republic Janet Mitchell Oct. 1998No 210: Values, Optimum Stimulation Levels and Brand Loyalty: NewScales in New Populations

Steven M. Burgess and MariHarris

Sept. 1998

No. 209: Inherited Wealth, Corporate Control and Economic Growth Randall K. Morck, David A.Stangeland, and Bernard Yeung

Sept. 1998

No. 208: A Cultural Analysis of Homosocial Reproduction andContesting Claims to Competence in Transitional Firms

Michael D. Kennedy July 1998

No. 207: From Survival to Success: The Journey of CorporateTransformation at Haier. Forthcoming in Managing OrganizationalChange in Transition Economies ed. Daniel Denison.

Arthur Yeung and KennethDeWoskin

July 1998

No. 206: Why Do People Work If They Are Not Paid? An Examplefrom Eastern Europe. Forthcoming in Managing Organizational Changein Transition Economies.

Irina L. Zinovieva May 1998

No. 205: Firm Ownership and Work Motivation in Bulgaria andHungary: An Empirical Study of the Transition in the Mid-1990s.Forthcoming in Managing Organizational Change in TransitionEconomies ed. Daniel Denison.

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

May 1998

No. 204: Human Resource Management in the Restructuring of ChineseJoint Ventures. Forthcoming in Managing Organizational Change inTransition Economies ed. Daniel Denison.

Nandani Lynton Apr. 1998

No. 203: Emergent Compensation Strategies in Post-Socialist Poland:Understanding the Cognitive Underpinnings of Management Practicesin a Transition Economy. Forthcoming in Managing OrganizationalChange in Transition Economies ed. Daniel Denison.

Marc Weinstein Mar. 1998

No. 202: Corporate Transformation and Organizational Learning: ThePeople’s Republic of China. Forthcoming in Managing OrganizationalChange in Transition Economies ed. Daniel Denison.

Meinolf Dierkes and ZhangXinhua

Mar. 1998

No. 201: Foreign Direct Investment as a Factor of Change: The Case ofSlovakia. Forthcoming in Managing Organizational Change inTransition Economies ed. Daniel Denison.

Sonia Ferencikova Feb. 1998

No. 200: Radical versus Incremental Change: The Role of Capabilities,Competition, and Leaders. Forthcoming in Managing OrganizationalChange in Transition Economies ed. Daniel Denison.

Karen L. Newman Feb. 1998

No. 199: The Emergence of Market Practices in China’s EconomicTransition: Price Setting Practices in Shanghai’s Industrial Firms.Forthcoming in Managing Organizational Change in TransitionEconomies ed. Daniel Denison.

Douglas Guthrie Feb. 1998

No. 198: The Application of Change Management Methods at BusinessOrganizations Operating in Hungary: Challenges in the Business andCultural Environment and First Practical Experiences. Forthcoming inManaging Organizational Change in Transition Economies ed. DanielDenison.

Dr. János Fehér Jan. 1998

No. 197: Organizational Changes in Russian Industrial Enterprises:Mutation of Decision-Making Structures and Transformations ofOwnership. Forthcoming in Managing Organizational Change inTransition Economies ed. Daniel Denison.

Igor B. Gurkov Jan. 1998

No. 196: Understanding and Managing Challenges to the RomanianCompanies during Transition. Forthcoming in Managing OrganizationalChange in Transition Economies ed. Daniel Denison.

Dan Candea and Rodica M.Candea

Jan. 1998


No. 195: Insider Lending and Economic Transition: The Structure,Function, and Performance Impact of Finance Companies in ChineseBusiness Groups. Forthcoming in Managing Organizational Change inTransition Economies ed. Daniel Denison.

Lisa A. Keister Dec. 1997

No. 194: Japanese Investment in Transitional Economies:Characteristics and Performance. Forthcoming in ManagingOrganizational Change in Transition Economies ed. Daniel Denison.

Paul W. Beamish and AndrewDelios

Nov. 1997

No. 193: Building Successful Companies in Transition Economies.Forthcoming in Managing Organizational Change in TransitionEconomies ed. Daniel Denison.

Dr. Ivan Perlaki Jan. 1998

No. 192: Russian Communitariansim: An Invisible Fist in theTransformation Process of Russia. Forthcoming in ManagingOrganizational Change in Transition Economies ed. Daniel Denison.

Charalambos Vlachoutsicos July 1998

No. 191: Teaching the Dinosaurs to Dance Michal Cakrt Sept. 1997No. 190: Strategic Restructuring: Making Capitalism in Post-Communist Eastern Europe. Forthcoming in Managing OrganizationalChange in Transition Economies ed. Daniel Denison.

Lawrence P. King Sept. 1997

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

Daniel Berkowitz and David N.DeJong

July 1998

No. 187: Corporate Structure and Performance in Hungary László Halpern and Gábor Kórsöi July 1998No. 186: Performance of Czech Companies by Ownership Structure Andrew Weiss and Georgiy

NikitinJune 1998

No. 185: Firm Performance in Bulgaria and Estonia: The effects ofcompetitive pressure, financial pressure and disorganisation

Jozef Konings July 1998

No. 184: Investment and Wages during the Transition: Evidence fromSlovene Firms

Janez Prasnikar and Jan Svejnar July 1998

No. 183: Investment Portfolio under Soft Budget: Implications forGrowth, Volatility and Savings

Chongen Bai and Yijiang Wang July 1998

No. 181: Delegation and Delay in Bank Privatization Loránd Ambrus-Lakatos andUlrich Hege

July 1998

No. 180: Financing Mechanisms and R&D Investment Haizhou Huang and ChenggangXu

July 1998

No. 179: Organizational Culture and Effectiveness: The Case of ForeignFirms in Russia

Carl F. Fey and Daniel R.Denison

Jan. 1999

No. 178: Output and Unemployment Dynamics in Transition Vivek H. Dehejia and Douglas W.Dwyer

Jan. 1998

No. 177: Published in: Economics of Transition, “Bureaucracies in theRussian Voucher Privatization.” 8(1), 2000, pp. 37-57.

Guido Friebel June 1998

No. 176: Chronic Moderate Inflation in Transition: The Tale of Hungary János Vincze June 1998No. 175: Privatisation and Market Structure in a Transition Economy John Bennett and James Maw June 1998No. 174: Ownership and Managerial Competition: Employee, Customer,or Outside Ownership

Patrick Bolton and ChenggangXu

June 1998

No. 173: Intragovernment Procurement of Local Public Good: ATheory of Decentralization in Nondemocratic Government

Chong-en Bai, Yu Pan andYijiang Wang

June 1998

No. 172: Political Instability and Growth in Proprietary Economies Jody Overland and MichaelSpagat

Aug. 1998

No. 171: Published in Post-Communist Economies, “Framework Issuesin the Privatization Strategies of the Czech Republic, Hungary, andPoland” 11(1) Mar. 1999.

Morris Bornstein June 1998

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

Frantisek Turnovec May 1998

No. 169 Published in: American Economic Review, “Unemployment andthe Social Safety Net during Transitions to a Market Economy:Evidence from Czech and Slovak Men” 88(5), Dec 1998, pp. 1117-1142

John C. Ham, Jan Svejnar, andKatherine Terrell

Dec. 1998


No. 167: Voucher Privatization with Investment Funds: An InstitutionalAnalysis

David Ellerman Mar. 1998

No. 166: Published in: Marketing Issues in Transitional Economies,“Value Priorities and Consumer Behavior in a Transitional Economy:The Case of South Africa” ed. Rajeev Batra.

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

Aug. 1998

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

Ronald Anderson and ChantalKegels

Sept. 1997

No. 163: European Union Trade and Investment Flows U-ShapingIndustrial Output in Central and Eastern Europe: Theory and Evidence

Alexander Repkine and Patrick P.Walsh

Apr. 1998

No. 162: Skill Acquisition and Private Firm Creation in TransitionEconomies

Zuzana Brixiova and Wenli Li Oct. 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 and Britain

Hartmut Lehmann and JonathanWadsworth

Nov. 1999

No. 160: Tenures that Shook the World: Worker Turnover in theRussian Federation and Poland

Hartmut Lehmann and JonathanWadsworth

June 1998

No. 159: Does Market Structure Matter? New Evidence from Russia Annette N. Brown and J. DavidBrown

June 1998

No. 158: Structural Adjustment and Regional Long TermUnemployment in Poland

Hartmut Lehmann and Patrick P.Walsh

June 1997

No. 157: Baby Boom or Bust? Changing Fertility in Post-CommunistCzech Republic and Slovakia

Robert S. Chase Apr. 1998

No. 156 Published in: Leadership and Organization DevelopmentJournal, “Leading Radical Change in Transition Economies.” Vol. 19,No. 6, 1998, pp. 309-324.

Karen L. Newman June 1998

No. 155 Published in: Oxford Review of Economic Policy, “FromTheory into Practice? Restructuring and Dynamism in TransitionEconomies.” Vol. 13, No. 2, Summer 1997, pp. 77-105.

Wendy Carlin and MichaelLandesmann

June 1997

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

Edmund Malesky, Vu ThanhHung, Vu Thi Dieu Anh, andNancy K. Napier

July 1998

No. 153 Published in: Journal of Comparative Economics, “Causes ofthe Soft Budget Constraint: Evidence on Three Explanations.” Vol. 26,No. 1, Mar. 1998, pp. 104-116.

David D. Li and Minsong Liang Mar. 1998

No. 152 Published in: Comparative Economic Studies, “EnterpriseRestructuring in Russia’s Transition Economy: Formal and InformalMechanisms.” Vol. 40, No. 2, Summer 1998, pp. 5-52.

Susan J. Linz and Gary Krueger Apr. 1998

No. 151: Labor Productivity in Transition: A Regional Analysis ofRussian Industry

Susan J. Linz May 1998

No. 150: Tax Avoidance and the Allocation of Credit. Forthcoming inFinancial Systems in Transition: The Design of Financial Systems inCentral Europe eds. Anna Meyendorff and Anjan Thakor.

Anna Meyendorff June 1998

No. 149: Commitment, Versatility and Balance: Determinants of WorkTime Standards and Norms in a Multi-Country Study of SoftwareEngineers

Leslie Perlow and Ron Fortgang Apr. 1998

No. 148: Changes in Poland’s Transfer Payments in the 1990s: the Fateof Pensioners

Bozena Leven June 1998

No. 147: Environmental Protection and Economic Development: TheCase of the Huaihe River Basin Cleanup Plan

Robert Letovsky, Reze Ramazani,and Debra Murphy

June 1998

No. 146: Chief Executive Compensation During Early Transition:Further Evidence from Bulgaria

Derek C. Jones, Takao Kato, andJeffrey Miller

June 1998

No. 145 Published in: Economics of Transition, “Women’sUnemployment During the Transition: Evidence from Czech and SlovakMicro Data,” Vol. 7, No. 1, May 1999, pp. 47-78.

John Ham, Jan Svejnar, andKatherine Terrell

May 1998

No. 144: Investment and Wages in Slovenia Janez Prasnikar May 1998


No. 143 Published in: Review of Financial Studies, “OptimalBankruptcy Laws Across Different Economic Systems,” 12(2), 47-77,Summer 19993.

Elazar Berkovitch and RonenIsrael

Mar. 1998

No. 142: Industrial Policy and Poverty in Transition Economies: TwoSteps Forward or One Step Back?

Susan J. Linz Mar. 1998

No. 141 Collective Ownership and Privatization of China’s VillageEnterprises

Suwen Pan and Albert Park Apr. 1998

No. 140 A Comparative Look at Labor Mobility in the Czech Republic:Where have all the Workers Gone?

Vit Sorm and Katherine Terrell Apr. 1999

No. 139 The Failure of the Government-Led Program of CorporateReorganization in Romania

Simeon Djankov and KosaliIlayperuma

Sept. 1997

No. 138 Ownership and Employment in Russian Industry: 1992-1995 Susan J. Linz Mar. 1998No. 137 Published in: Journal of Political Economy, “Reform WithoutLosers: An Interpretation of China’s Dual-Track Approach toTransition,” Feb. 2000; Vol. 108, Iss.1; pg. 120

Lawrence J. Lau, Yingyi Qian,and Gerard Roland

Nov. 1997

No. 136 Published in: European Economic Review, “The PoliticalEconomy of Mass Privatization and the Risk of Expropriation,” 44(2),Feb. 2000, pgs. 393-421

Klaus M. Schmidt Mar. 1998

No. 135: Radical Organizational Change: The Role of StartingConditions, Competition, and Leaders

Karen L. Newman Jan. 1998

No. 134: To Restructure or Not to Restructure: Informal Activities andEnterprise Behavior in Transition

Clifford Gaddy and Barry W.Ickes

May 1998

No. 133: Management 101: Behavior of Firms in Transition Economies Josef C. Brada Mar. 1998No. 132 Published in: Quarterly Journal of Economics, “InterfirmRelationships and Informal Credit in Vietnam,” 114(4), Nov. 1999, pgs.1285-1320

John McMillan and ChristopherWoodruff

Feb. 1998

No. 131 Published in: Comparative Economic Studies, “WillRestructuring Hungarian Companies Innovate? An Investigation Basedon Joseph Berliner’s Analysis of Innovation in Soviet Industry.” Vol.40, No. 2, Summer 1998, pp. 53-74.

John B. Bonin and Istvan Abel Mar. 1998

No. 130: Published in The American Economic Review, “ChangingIncentives of the Chinese Bureaucracy.” May, 1998.

David D. Li Jan. 1998

No. 129: Restructuring Investment in Transition: A Model of theEnterprise Decision

Richard E. Ericson Jan. 1998

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

Susan J. Linz Jan. 1998

No. 127: Accounting for Growth in Post-Soviet Russia Daniel Berkowitz and David N.DeJong

Jan. 1998

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

Yuanzheng Cao, Yingyi Qian,and Barry R. Weingast

Dec. 1997

No. 125: Market Discipline in Conglomerate Banks: Is an InternalAllocation of Cost of Capital Necessary as Incentive Device?Forthcoming in Financial Systems in Transition: The Design ofFinancial Systems in Central Europe eds. Anna Meyendorff and AnjanThakor.

Arnoud W. A. Boot and AnjoleinSchmeits

Nov. 1997

No. 124: Financial Discipline in the Enterprise Sector in TransitionCountries: How Does China Compare?

Shumei Gao and Mark E.Schaffer

Feb. 1998

No. 123: Considerations of an Emerging Marketplace: Managers’Perceptions in the Southern African Economic Community

Brent Chrite and David Hudson Feb. 1998

No. 122: A Model of the Informal Economy in Transition Economies Simon Commander and AndreiTolstopiatenko

Nov. 1997

No. 121: Local Labour Market Dynamics in the Czech and SlovakRepublics

Peter Huber and AndreasWorgotter

Nov. 1997

No. 119: Published in Academy of Management Review, “OrganizationalTransformation during Institutional Upheaval,” 25 (3), 2000, p. 602-619

Karen L. Newman Mar. 1998


No. 118: Industrial Decline and Labor Reallocation in Romania John S. Earle Oct. 1997No. 117: Notes for an Essay on the Soft Budget Constraint Lorand Ambrus-Lakatos Jan. 1997No. 116: Labor Demand During Transition in Hungary Gabor Korosi Oct. 1997No. 115: Enterprise Performance and Managers’ Profiles Simeon Djankov and Stijn

ClaessensDec. 1997

No. 114b Employment and Wages in Enterprises under Communismand in Transition: Evidence From Central Europe and Russia

Swati Basu, Saul Estrin, and JanSvejnar

Apr. 2000

No. 114: Employment and Wage Behavior of Enterprises in TransitionalEconomies

Swati Basu, Saul Estrin, and JanSvejnar

Oct. 1997

No. 113: Preliminary Evidence on Active Labor Programs’ Impact inHungary and Poland

Christopher J. O’Leary Oct. 1997

No. 111: Unemployment Benefits and Incentives in Hungary: NewEvidence

Joachim Wolff Oct. 1997

No. 110: Published in: Empirical Economics, “Long-TermUnemployment, Unemployment Benefits and Social Assistance: ThePolish Experience” Empirical-Economics; 23(1-2), 1998, pp. 55-85.

Marek Gora and Christoph M.Schmidt

Apr. 1997

No. 109 Published in: Industrial and Labor Relations Review, “Marketsfor Communist Human Capital: Returns to Education and Experience inPost-Communist Czech Republic and Slovakia.” 51(3), Apr. 1998, pp.401-423.

Robert S. Chase Oct. 1997

No. 107: The Worker-Firm Matching in the Transition: (Why) Are theCzechs More Successful Than Others?

Daniel Münich, Jan Svejnar, andKatherine Terrell

Oct. 1997

No. 106 Published in: Journal of Comparative Economics, “JobCreation, Job Destruction and Growth of Newly Established, Privatizedand State-Owned Enterprises in Transition Economies: Survey Evidencefrom Bulgaria, Hungary, and Romania,” 26(3), Sept. 1998, pp. 429-445.

Valentijn Bilsen and JozefKonings

Sept. 1998

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

Michael Burda and ChristophSchmidt

May 1997

No. 104: The Birth of the “Wage Curve” in Hungary, 1989-95 Gabor Kertesi and Janos Kollo Oct. 1997No. 103: Published in: Journal of Comparative Economics, “Grime andPunishment: Job Insecurity and Wage Arrears in the RussianFederation” 27, 595-617 (1999).

Hartmut Lehmann, JonathanWadsworth, and AlessandroAcquisti

Oct. 1997

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

Oct. 1997

No. 101: Depreciation and Russian Corporate Finance: A PragmaticApproach to Surviving the Transition

Susan J. Linz Nov. 1997

No. 100: Romanian Financial System Reform Anna Meyendorff and Anjan V.Thakor

Nov. 1997

No. 99: Proceedings of the Conference on Strategic Alliances inTransitional Economies, held May 20, 1997 at the Davidson Institute

Edited by Cynthia Koch May 1997

No. 98: Institutions, Strain and the Underground Economy Daniel Daianu and Lucian Albu Nov. 1997No. 97: Structure and Strain in Explaining Inter-Enterprise Arrears Daniel Daianu Nov. 1997No. 96: Resource Misallocation and Strain: Explaining Shocks in Post-Command Economies

Daniel Daianu Nov. 1997

No. 95: Published in: Finance-a-Uver, “Czech Money Market: EmergingLinks Among Interest Rates.” 48(2) 1998 pp. 99-109.

Jan Hanousek and EvzenKocenda

Nov. 1997

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

Xiao-Yuan Dong and LouisPutterman

Oct. 1997

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

Xiao-Yuan Dong and LouisPutterman

Oct. 1997

No. 92: Expatriate Management in the Czech Republic Richard B. Peterson Sept. 1997No. 91: China and the Idea of Economic Reform Thomas G. Rawski Apr. 1997No. 90 Published in: China Economic Review, “China’s State EnterpriseReform: An Overseas Perspective.” Vol. 8, Spring 1997, pp. 89-98.

Thomas G. Rawski July 1997


No. 89: The Economic Determinants of Internal Migration Flows inRussia During Transition

Annette N. Brown July 1997

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

Margaret Maurer-Fazio, ThomasG. Rawski, and Wei Zhang

July 1997

No. 87: Privatisation in Central and Eastern Europe Saul Estrin June 1997No. 86: Published in : Economics of Transition, “The Effect ofPrivatization on Wealth Distribution in Russia.” v. 7, no. 2, 1999, pp.449-65

Michael Alexeev Feb. 1998

No. 85: Was Privatization in Eastern Germany a Special Case? SomeLessons from the Treuhand

Uwe Siegmund Sept. 1997

No. 84: Start-ups and Transition Daniel M. Berkowitz and David J.Cooper

Sept. 1997

No. 83: Which Enterprises (Believe They) Have Soft Budgets afterMass Privatization? Evidence from Mongolia

James Anderson, GeorgesKorsun, and Peter Murrell

Oct. 1997

No. 82: Published in: European Economic Review, “UnemploymentDynamics and the Restructuring of the Slovak Unemployment BenefitSystem.” Apr., 1997.

Martina Lubyova and Jan C. vanOurs

June 1997

No. 81: Determinants of Unemployment Duration in Russia Mark C. Foley Aug. 1997No. 80: The Many Faces of Information Disclosure Arnoud W.A. Boot and Anjan V.

ThakorOct. 1997

No. 79: Published in: Journal of Finance, “Foreign Speculators andEmerging Equity Markets.”v.22, iss. 2, 2000, pp. 565-613

Geert Bekaert and Campbell R.Harvey

Aug. 1997

No. 78: The Relationship Between Economic Factors and EquityMarkets in Central Europe

Jan Hanousek and Randall K.Filer

June 1997

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

Thesia I. Garner and KatherineTerrell

May 1998

No. 76: China’s Emerging Market for Property Rights: Theoretical andEmpirical Perspectives

Gary H. Jefferson and Thomas G.Rawski

June 1997

No. 75b: Test of Permanent Income Hypothesis on Czech VoucherPrivatization

Jan Hanousek and Zdenek Tima Oct. 1997

No. 74: Determinants of Performance of Manufacturing Firms in SevenEuropean Transition Economies

Stijn Claessens, Simeon Djankov,and Gerhard Pohl

Feb. 1997

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

Simeon Djankov and GerhardPohl

May 1998

No. 72: Law, Relationships, and Private Enforcement: TransactionalStrategies of Russian Enterprises

Kathryn Hendley, Peter Murrell,and Randi Ryterman

Nov. 1998

No. 71: Giving Credit Where Credit Is Due: The Changing Role ofRural Financial Institutions in China

Albert Park, Loren Brandt, andJohn Giles

Mar. 1997

No. 70: Privatization Versus Competition: Changing EnterpriseBehavior in Russia

John S. Earle and Saul Estrin Spring1997

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

Igor Gurkov Oct. 1998

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

Yasheng Huang Spring1997

No. 67: Between Two Coordination Failures: Automotive IndustrialPolicy in China with a Comparison to Korea

Yasheng Huang Spring1997

No. 66 Published in: Post-Soviet Geography and Economics, “RedExecutives in Russia’s Transition Economy.” Vol. 27, No. 10, Nov.1996, pp. 633-651.

Susan J. Linz Jan. 1997

No. 65 Published in: Industrial and Corporate Change, “On theSequencing of Privatization in Transition Economies.” Vol. 7, No. 1,1998.

Gautam Ahuja and Sumit K.Majumdar

Apr. 1997

No. 64: Published in: Journal of Law and Economics, “ForeignOwnership and Profitability: Property Rights, Control and thePerformance of Firms in Indian Industry” 42(1), Apr. 1999, pp. 209-38.

Pradeep K. Chhibber and SumitK. Majumdar

Apr. 1997


No. 63: How Taxing Is Corruption on International Investors? Shang-Jin Wei Feb. 1997No. 62: What Can We Learn from the Experience of TransitionalEconomies with Labour Market Policies?

Tito Boeri 1997

No. 61: Published in: Accounting Organizations and Society,“Economic Transition, Strategy and the Evolution of ManagementAccounting Practices: The Case of India” 24(5,6), Jul/Aug 1999, pp.379-412.

Shannon W. Anderson andWilliam N. Lanen

Apr. 1997

No. 60a: Enterprise Investment During the Transition: Evidence fromCzech Panel Data

Lubomír Lizal and Jan Svejnar Dec. 1997

No. 59: Published in: Journal of Law, Economics, and Organization,“Institutional Environment, Community Government, and CorporateGovernance: Understanding China’s Township-Village Enterprises.”14(1), Apr. 1998, pages 1-23

Jiahua Che and Yingyi Qian Apr. 1997

No. 58: From the Grabbing Hand to the Helping Hand Jiahua Che June 2000No. 57: Published in: Brookings Papers on Economic Activity, “TheUnofficial Economy in Transition.” 1: 1998.

Simon Johnson, DanielKaufmann, and Andrei Schleifer

June 1997

No. 56: Taxes and Government Incentives: Eastern Europe vs. China Roger H. Gordon and David D. Li Apr. 1997No. 55: Corruption and Reform Susanto Basu and David Li June 1996No. 54: Decentralization and the Macroeconomic Consequences ofCommitment to State-Owned Firms

Loren Brandt and Xiaodong Zhu June 1997

No. 53: Published in: The International Journal of IndustrialOrganization, “Competitive Shocks and Industrial Structure: The Caseof Polish Manufacturing.” Aug., 1999. .

Pankaj Ghemawat and Robert E.Kennedy

May 1997

No. 52: Published in: The Quarterly Journal of Economics, “InsecureProperty Rights and Government Ownership of Firms.” May, 1998.

Jiahua Che and Yingyi Qian May 1997

No. 51: Incentives, Scale Economies, and Organizational Form Eric Maskin, Yingyi Qian, andChenggang Xu

May 1997

No. 50: Published in: Post-Soviet-Affairs, “End of the Tunnel? TheEffects of Financial Stabilization in Russia” Apr.-June 1997, pages 105-33

Barry W. Ickes, Peter Murrell,and Randi Ryterman

Mar. 1997

No. 49: The Evolution of Bank Credit Quality in Transition: Theory andEvidence from Romania

Enrico C. Perotti and OctavianCarare

Oct. 1996

No. 48: Where Do the Leaders Trade? Information Revelation andInteractions Between the Segments of Czech Capital Markets

Jan Hanousek and LiborNemecek

May 1997

No. 47: Firms’ Heterogeneity in Transition: Evidence from a PolishPanel Data Set

Irena Grosfeld and Jean-FrançoisNivet

May 1997

No. 46: Strategic Creditor Passivity, Regulation, and Bank Bailouts Janet Mitchell May 1997No. 45a: Published in: Journal of Public Economics, “Tax Rights inTransition Economies: A Tragedy of the Commons.” 76, 2000, pp. 369-397

Daniel M. Berkowitz and Wei Li Sept. 1997

No. 44a: The Information Content of Stock Markets: Why do EmergingMarkets have Synchronous Stock Price Movements? (forthcoming inthe Journal of Financial Economics).

Randall Morck, Bernard Yeung,and Wayne Yu

Feb. 1999

No. 43: Agency in Project Screening and Termination Decisions: WhyIs Good Money Thrown After Bad?

Chong-en Bai and Yijiang Wang May 1997

No. 42: Published in: Economics of Transition, “Channels ofRedistribution: Inequality and Poverty in the Russian Transition.” Vol. 7(2) 1999.

Simon Commander, AndreiTolstopiatenko, and RuslanYemtsov

May 1997

No. 41: Published in: Economics of Transition, “Labour MarketCharacteristics and Profitability: Econometric Analysis of HungarianExporting Firms, 1986-1995” 6(1), May 1998, pages 145-62

László Halpern and Gabor Korosi May 1997

No. 40: Published in: the Harvard Law Review, “The Tragedy of theAnticommons: Property in the Transition from Marx to Markets.” Jan.1998.

Michael Heller Feb. 1997

No. 39: Privatization and Managerial Efficiency Olivier Debande and GuidoFriebel

May 1997


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

Olivier Blanchard and MichaelKremer

Jan. 1997

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

Gérard Roland and ThierryVerdier

Mar. 1997

No. 36: Restructuring an Industry During Transition: A Two-PeriodModel

Richard Ericson Sept. 1996

No. 34: The East-West Joint Venture: BC Torsion Case Study Sonia Ferencikova and VernTerpstra

Dec. 1998

No. 33 Published in: Journal of Comparative Economics, “QuantifyingPrice Liberalization in Russia.” Vol. 26, No. 4, Dec. 1998, pp. 735-737.

Daniel Berkowitz, David DeJong,and Steven Husted

Dec. 1998

No. 32: What Can North Korea Learn from China’s Market Reforms? John McMillan Sept. 1996No. 31: Published in: China-Economic-Review, “Towards a Model ofChina as a Partially Reformed Developing Economy Under aSemifederalist Government.” 9(1), Spring 1998, pages 1-23.

Yijiang Wang and Chun Chang Mar. 1997

No. 30: Convergence in Output in Transition Economies: Central andEastern Europe, 1970-1995

Saul Estrin and Giovanni Urga Feb. 1997

No. 29: Published in: Economics of Transition, “Altered Band andExchange Volatility.” Volume 6, no. 1, 1998, 173-181.

Evzen Kocenda Mar. 1997

No. 28: Published in: Quarterly Journal of Economics, “Public VersusPrivate Ownership of Firms: Evidence from Rural China.” Volume 113,no. 3, Aug. 1998, 773-808.

Hehui Jin and Yingyi Qian Jan. 1997

No. 27: East-West Joint Ventures in a Transitional Economy: The Caseof Slovakia

Sonia Ferencikova Mar. 1997

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

Janez Prasnikar Feb. 1997

No. 25: Cultural Encounters and Claims to Expertise in PostcommunistCapitalism

Michael D. Kennedy Feb. 1997

No. 24: ZVU a.s.: Investment Funds on the Board of Directors of anEngineering Giant

Tory Wolff Aug. 1995

No. 23: The Role of Investment Funds in the Czech Republic (jointpublication with Czech Management Center)

Dusan Triska June 1996

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

Richard Podpiera May 1996

No. 21: Restructuring of Czech Firms: An Example of Gama, a.s. (jointpublication with Czech Management Center)

Antonin Bulin June 1996

No. 20: YSE Funds: A Story of Czech Investment Funds (jointpublication with Czech Management Center)

Michal Otradovec Nov. 1995

No. 19: První Investicni a.s., The First Investment Corporation (jointpublication with Czech Management Center)

Jaroslav Jirasek Aug. 1995

No. 18: PPF a.s., The First Private Investment Fund (joint publicationwith Czech Management Center)

Michal Otradovec Nov. 1995

No. 17 Published in: Post-Soviet Geography and Economics, “Russia’sManagers in Transition: Pilferers or Paladins?” 37(7) (Sept. 1996), pp.397-426.

Susan J. Linz and Gary Krueger Nov. 1996

No. 16: Banks in Transition—Investment Opportunities in CentralEurope and Russia, Edited Transcript from 31 May 1996 Conference inNew York City

With commentary and edited byAnna Meyendorff

Jan. 1997

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

Compiled by The DavidsonInstitute

Dec. 1996

No. 14: Pensions in the Former Soviet Bloc: Problems and Solutions.Published by Council on Foreign Relations. “The Coming GlobalPension Crisis” New York, 1997

Jan Svejnar Nov. 1996

No. 13: Enterprise Restructuring and Performance in the Transition.Forthcoming in Financial Systems in Transition: The Design ofFinancial Systems in Central Europe eds. Anna Meyendorff and AnjanThakor.

Lubomir Lizal, Miroslav Singer,and Jan Svejnar

Dec. 1996


No. 12 Published in: Journal of International Marketing, “ExecutiveInsights: Marketing Issues and Challenges in Transitional Economies.”Vol. 5, No. 4, 1997, pp. 95-114. Also published in: Marketing Issues inTransitional Economies ed. Rajeev Batra.

Rajeev Batra Apr. 1997

No. 11: Worker Trust and System Vulnerability in the Transition fromSocialism to Capitalism

Andrew Schotter Aug. 1996

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

Susan J. Linz July 1996

No. 9: Corporate Debt Crisis and Bankruptcy Law During theTransition: The Case of China

David D. Li and Shan Li Dec. 1995

No. 8 Published in: Journal of Comparative Economics, “A Theory ofAmbiguous Property Rights in Transition Economies: The Case of theChinese Non-State Sector.” Vol. 23, No. 1, Aug. 1996, pp. 1-19.

David D. Li June 1996

No. 7: The Foreign Economic Contract Law of China: Cases andAnalysis

Dong-lai Li June 1993

No. 3: Bank Privatization in Hungary and the Magyar KulkereskedelmiBank Transaction

Roger Kormendi and KarenSchnatterly

May 1996

Replacing No. 1: Journal of Comparative EconomicsSymposium on “Bank Privatization in Central Europe andRussia.” Vol. 25, No. 1, Aug. 1997.

“Bank Privatization in TransitionalEconomies,” Roger Kormendi and EdwardSnyder.

Aug. 1997


“Transactional Structures of BankPrivatizations in Central Europe andRussia,” Anna Meyendorff and Edward A.Snyder.

Aug. 1997


“Bank Privatization in Poland: The Case ofBank Slaski,” Jeffery Abarbaness and JohnBonin.

Aug. 1997


“Bank Privatization in Post-CommunistRussia: The Case of Zhilsotsbank,” JefferyAbarbanell and Anna Meyendorff

Aug. 1997


“The Czech Republic’s Commercial Bank:Komercni Banka,” Edward A. Snyder andRoger C. Kormendi.

Aug. 1997

R&D and Technology Spillovers via FDI: Innovation and Absorptive

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Transcript of R&D and Technology Spillovers via FDI: Innovation and Absorptive