Not All That Glitters

Abstract

Although foreign subsidiaries usually perform better than the average of the hosting economies, empirical literature has also established that the selection effect is statistically significant. In this paper we attempt to evaluate its economic relevance, using a unique data set of annual financial reports by all medium and large Polish enterprises over the period 1995-2007. We match firms privatized with the use of foreign direct investment (FDI) to a control group of nonprivatized state-owned companies in order to disentangle the effect of self-selection and FDI entry. Evidence suggests that although FDI enters more frequently into companies that already participate in the international trading networks, roughly half the export intensity differential may be attributed to the entry of FDI. On the other hand, selection effects seem to dominate as far as efficiency is concerned, whereas only toward the end of the sample may the positive effect of FDI on profitability be confirmed.