Does FDI spur innovation, productivity and knowledge sourcing byincumbent firms? Evidence from manufacturing industry in Estonia

Does FDI affect productivity growth, innovation, and knowledge sourcing activities ofdomestic firms? This study employs detailed firm-level panel-data from Estonia’smanufacturing sector to investigate different channels through which FDI can affectdomestic firms. I use instrumental variables approach to identify the effects. I find noevidence of an effect of FDI entry on local incumbents’ TFP and labour productivitygrowth in the short term. The effect on productivity does not depend on the local firms’distance to the productivity frontier. However, there are positive spillovers on processinnovation. The results show significant positive correlation between the entry of FDIin a sector and the more direct measures of spillovers in subsequent periods. This isconsistent with the view that FDI inflow to a sector intensifies knowledge flows todomestic firms....