Productivity Gap: A Chance or an Obstacle in Absorbing Benefits from FDI in a Host Country

Abstract

Objective: The objective of this study was to determine the relationship between labour productivity in Poland, the presence of foreign direct investment and productivity gap between Poland and the EU-15. Research Design & Methods: Panel data techniques including pooled, fixed and random effects models, as well as diagnostic tests were used in this study. The idea was to find the relation between labour productivity measured by gross value added per employee (or hours worked) and the degree of the penetration of foreign capital. Findings: While investment decisions regarding the choice of a country are determined by the size of the target market, the distance is still a negative factor in the creation of FDI volume. Additionally, the backwardness of business or its relative proximity in terms of labour productivity in relation to the EU-15 is an unfavourable factor when it comes to the improvement of productivity. Implications & Recommendations: The results that we have obtained confirm the hypothesis that there exists an optimal level of productivity gap implying high absorption benefits of FDI presence. Moreover, an increasing involvement of foreign investors in different sectors implies both higher productivity of these sectors and the gap reduction. This may prove that too small or too huge productivity gap is an obstacle to the absorption of benefits from the presence of foreign capital to boost productivity by local firms. Contribution & Value Added: The study contributes to the observation in the existing literature that an increasing accumulation of FDI is accompanied by the progressive convergence of productivity between the UE-15 and Poland almost across all sectors. The heterogeneity of the phenomenon is noticeable on the sectoral level, which seems to be unsaid in the majority of empirical studies basing on national-aggregated data.