FDI spillovers at different levels of industrial and spatial aggregation: Evidence from the electricity sector

Abstract

The European electricity sector has undergone significant reforms in recent years, in the direction of market opening, integration and privatization. National and regional markets are now characterized by the presence of domestic and foreign firms, both privately and publicly owned. Did foreign entry induce positive productivity spillovers to domestic firms in the electricity sector, both at the aggregate and disaggregated level, while also controlling for domestic firms' ownership? This paper examines this issue by focusing on regional foreign direct investment (FDI) spillovers in the aggregated electricity sector and in the disaggregated sub-sectors of generation and distribution. The results show the importance of industry aggregation in determining the existence and sign of regional FDI spillovers for domestic firms. FDI spillovers are then calculated based on a purely geographic scale, by considering the distance between each firm's city of location and firms in neighboring cities. The importance and sign of FDI spillovers is different with respect to the analysis based on regional administrative boundaries, suggesting that spatial aggregation, along with industrial aggregation, is relevant in accounting for productivity spillover effects of foreign presence in the EU electricity sector.