Does foreign investment improve technical efficiency of manufacturing? Evidence from the Republic of Serbia
Keywords:
Technical Efficiency, Foreign direct investment (FDI), Stochastic frontier model, Serbian manufacturing
Abstract
Based on a balanced panel data on a sample of 92 manufacturing groups over the period 2010-2019 this paper finds strong evidence for the existence of positive impact of foreign direct investment on technical efficiency. Throughout this period Serbia lost 28% of the potential output of the manufacturing sector due to technical inefficiency. The finding is directly supported by the results at the level of the observed groups. Thus, the greatest increase in technical efficiency is in branches with a high share of foreign ownership, such as: production of motor vehicles, production of chemicals, and production of wire and cable equipment. The methodology is based on stochastic frontier analysis - within that, 'true' random effects model. The paper contributes to the understanding of potential effects on foreign invested enterprises on domestic economy in general and local enterprises performance in particular. Thus it importantly assists policy making by the government of developing countries, where FDI is believed to create technical spillovers on domestic enterprises.
References
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Wiboonchutikula, Paitoon, Phucharoen, Chayanon and Pruektanakul, Nuchit (2016). SPILLOVER EFFECTS OF FOREIGN DIRECT INVESTMENT ON DOMESTIC MANUFACTURING FIRMS IN THAILAND, The Singapore Economic Review (SER), 61, issue 02, p. 1-32.
Battese, George E., & Coelli, Timothy. (1985). A model for technical inefficiency effects in a stochastic frontier production function for panel data, Journal of Econometrics, 20, 325–332
Battese, George E., & Coelli, Timothy (1988). Prediction of firm-level technical efficiencies with a generalized frontier production function and panel data. Journal of Econometrics, 38 (3), 387-399.
Fedorova, Elena A., Nikolaev, Aleksei E., Shirokova, Yuliya S. and Fedorov, Fedor Yu. (2019). Export and Import Activities of Russian Companies With FDI in the Context of Sanctions, Finansovyj žhurnal — Financial Journal, issue 3, p. 75-90.
Greene, W.H. (2005a). Fixed and Random Effects in Stochastic Frontier Models. Journal of Productivity Analysis, 23, 7–32.
Greene, W.H. (2005b). Reconsidering heterogeneity in panel data estimators of the stochastic frontier model. Journal of Econometrics 126, 269–303
Hanousek, Jan, Kočenda, Evžen and Masika, Michal (2012). Firm Efficiency: Domestic Owners, Coalitions, and FDI, CERGE-EI Working Papers, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
Jiang, Mingming (2012), On the Performance of Foreign Direct Investment in China: 1981-2004, Economics Bulletin, 32, issue 4, p. 3320-3332.
Jondrow, J., Materov, I., Lovell, K., Schmidt, P. (1982). On the estimation of technical inefficiency in the stochastic frontier production function model. Journal of Econometrics 19 (2/3), 233–238.
Keshari, Pradeep (2013). Efficiency spillovers from FDI in the Indian machinery industry: a firm-level study using panel data models, MPRA Paper, University Library of Munich, Germany.
Kodde, D.A. and Palm, F.C. (1986). Wald Criteria for Jointly Testing Equality and Inequality Restrictions. Econometrica, 54, 1243-1248.
Kumbhakar, & Lovell. (2000). Stochastic Frontier Analysis. Cambridge UK: Cambridge University Press, pp. 343
Kumbhakar, S.C., Denny, M., & Fuss, M. (2000). Estimation and decomposition of productivity change when production is not efficient: a panel data approach. Econometric Reviews, 19(4), 312–320.
Kumbhakar, Wang, & Horncastle. (2015). A Practitioner’s Guide to Stochastic Frontier Analysis Using Stata, Cambridge University Press, pp. 556.
Meeusen, W., and J. van den Broeck. (1977). Efficiency estimation from Cobb–Douglas production functions with composed error. International Economic Review 18: 435–444.
National Bank of Serbia, Inflation Report – February 2021, p. 27
Nikolić, I. (2020a). FDI CONTRIBUTION TO TECHNICAL EFFICIENCY IN THE SERBIAN MANUFACTURING SECTOR, p. 71-73, in: Emerging Trends in Business Economics: Towards Competitiveness, Digitalization and Financial Innovation - Book of Abstracts, ed. Ljumović, I., Simović, V., & Marjanović, D., 13th International Scientific Conference, Institute of Economic Sciences, ISBN 978-86-89465-56-3
Nikolić, I. (2020b). Tehnička (ne)efikasnost prerađivačke industrije Srbije u periodu 2010-2018 - kakav je efekat stranih investicija?, str. 174-190, u: IZAZOVI održivog razvoja u Srbiji i Evropskoj uniji, Institut društvenih nauka, Beograd, 319 str. ISBN 978-86-7093-237-1
Phan, Lien and Ngo, Quang – Thanh (2012). Do FDI enterprises work more efficiently than domestic ones in Vietnam? Evidence from panel data analysis, No 24, Working Papers, Development and Policies Research Center (DEPOCEN), Vietnam.
Sur, Abhisek and Nandy, Amarendu (2018). FDI, technical efficiency and spillovers: Evidence from Indian automobile industry, Cogent Economics & Finance, 6, issue 1.
Suyanto, Suyanto and Salim, Ruhul (2013). Foreign direct investment spillovers and technical efficiency in the Indonesian pharmaceutical sector: firm level evidence, Applied Economics, 45, issue 3, p. 383-395.
Suyanto, Suyanto, Salim, Ruhul and Bloch, Harry (2014). Which firms benefit from foreign direct investment? Empirical evidence from Indonesian manufacturing, Journal of Asian Economics, 33, issue C, p. 16-29.
Vu, Duong and Van Hung, Le. (2017). FDI Spill‑Overs, Absorptive Capacity and Domestic Firms’ Technical Efficiency in Vietnamese Wearing Apparel Industry, Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 65, issue 3, p. 1075-1084.
Vu, Duong (2016). Technical efficiency of FDI firms in the Vietnamese manufacturing sector, Review of Economic Perspectives, 16, issue 3, p. 205-230.
Wang, Miao and Wong, M. C. Sunny. (2012). International R&D Transfer and Technical Efficiency: Evidence from Panel Study Using Stochastic Frontier Analysis, World Development, 40, issue 10, p. 1982-1998.
Wang, Miao and Wong, M. C. Sunny. (2016). Effects of Foreign Direct Investment on Firm-level Technical Efficiency: Stochastic Frontier Model Evidence from Chinese Manufacturing Firms, Atlantic Economic Journal, 44, issue 3, p. 335-361.
Wiboonchutikula, Paitoon, Phucharoen, Chayanon and Pruektanakul, Nuchit (2016). SPILLOVER EFFECTS OF FOREIGN DIRECT INVESTMENT ON DOMESTIC MANUFACTURING FIRMS IN THAILAND, The Singapore Economic Review (SER), 61, issue 02, p. 1-32.