Competitiveness gap and host country effects of FDI in the new OECD

Abstract

This paper analyses the relationship between foreign direct investment intensity and labour productivity of manufacturing industries in 14 OECD countries including the recent OECD members from Central Europe: the Czech Republic, Hungary, Poland and Slovakia. I find the relationship between industry-level FDI intensity and labour productivity in the four new OECD members was significant and positive in 1992–2003 but weaker than in other OECD nations. The study builds on the FDI spillover literature analysing the ‘technology gap’ between foreign entrants and local firms originating from the host country. I introduce a concept of a ‘competitiveness gap’ that accounts for differences in intangible assets and labour productivity between foreign entrants and all firms in the host country industry (including foreign ones already there). My theoretical discussion and empirical findings confirm that industries with a low competitiveness gap benefited most from FDI in Central Europe in the medium run.