The foreign direct investment (FDI) and its impact on performance of domestic firms has been studied in many empirical papers, which, however, present rather ambiguous results. I argue that this is due to some limitations of prevalently used methodology, which does not separate the FDI spillover effects from the changes in competitive environment faced by domestic firms. I propose a novel estimation strategy that allows me to disentangle FDI spillovers from the effects of competition changing in response to the entry of a foreign firm. I consider this issue on the industry level and I compare the effects of FDI to the impact of international trade on the domestic economy. My analysis covers the time period 2001 - 2007 and concerns both Western and Eastern European countries. My identification strategy leads me to confirm the presence of positive spillovers stemming from FDI.
