Abstract
There is a growing literature focusing on analyzing the productivity gap between domestic and foreign firms with differences in innovation indicators. In this chapter, we analyze the relationship between inward and outward foreign direct investment (FDI) at either company or industry level and the innovation behavior of companies in Estonia. We used company-level data from three waves of the Community Innovation Surveys, which were combined with financial data from the Estonian Business Register and FDI data from the Balance of Payments statistics. For the analysis, we used propensity score matching. Our results show that the higher innovation output of foreign-owned companies vanished after controlling for a number of company characteristics, but there were significant differences in innovation inputs, such as the higher use of knowledge sourcing and the lower importance of various impeding factors. Both domestic and foreign-owned firms with outward investments are more innovative.
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Notes
- 1.
The CEE countries mostly belong to the group of countries with a fixed low level of product innovation and varying low levels of process innovation, whereas Estonia is the only one among all the CEE countries that belongs to the group of countries with high innovativeness dominated by product innovation (Meriküll 2008).
- 2.
For instance, whereas in 1997, foreign-owned firms were about twice as productive as local firms, in 2006 the difference was only 1.7 times (our own calculations based on Estonian Business Register data for the business sector).
- 3.
For Kernel matching, the Epanechnikov kernel was used with the bandwidth set at 0.06.
- 4.
In CIS4, the dataset includes Belgium, Bulgaria, Czech Republic, Germany, Estonia, Greece, Spain, Hungary, Italy, Latvia, Lithuania, Portugal, Romania, Slovenia, Slovakia, and Norway. CIS3 includes Iceland in addition to these, but excludes Slovenia.
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Acknowledgments
The article was partly written during the period when Jaan Masso was a visiting researcher at Eesti Pank (Bank of Estonia, the central bank of Estonia). We acknowledge the financial support given by the Ministry of Education and Research of the Republic of Estonia target financed project no. SF0180037s08 and Estonian Science Foundation grants no. 6853, 8311, and 7405. We are grateful for the comments made by the participants of seminars held Tallinn and Tartu, but also Jaanika Meriküll. We are also grateful to Eurostat for providing the Fourth Community Innovation Survey microdata to the University of Tartu; however, Eurostat had no responsibility for the results or conclusions of the paper. We are solely responsible for all errors and omissions.
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Appendix A Definitions and Summary Statistics of Variables Used in Descriptive Tables and Regression Analysis
Appendix A Definitions and Summary Statistics of Variables Used in Descriptive Tables and Regression Analysis
Variable name | Variable definitions | Mean | Standard deviation |
Foreign firm | Dummy; 1 if foreign owners have the majority in the firm | 0.181 | 0.385 |
Local firms | Dummy; 1 if domestically owned firm and without outward FDI | 0.791 | 0.407 |
Domestic outward investors | Dummy; 1 if domestically owned firm with outward FDI | 0.025 | 0.155 |
Foreign firm without outward FDI | Dummy; 1 if foreign owned without outward FDI | 0.167 | 0.373 |
Foreign outward investors | Dummy; 1 if foreign owned firm with outward FDI | 0.013 | 0.114 |
Export dummy | Dummy, 1 if firm has positive exports | 0.640 | 0.480 |
Log number of employees | Natural log of the number of employees | 3.269 | 1.188 |
Product innovation | Dummy, 1 if firm reports having introduced new or significantly improved product | 0.213 | 0.409 |
Process innovation | Dummy, 1 if firm reports having introduced new or significantly improved production process | 0.218 | 0.413 |
Sales from new products per employee | Sales from new products per employee, in thousands of kroons | 52.354 | 497.295 |
Continuous R&D engagement dummy | 1 if firm reports continuous engagement in intramural R&D activities | 0.068 | 0.252 |
R&D expenditure | Total innovation expenditure per employee (in thousands of kroons) | 26.701 | 894.669 |
Innovation expenditure | Total R&D expenditure per employee (in thousands of kroons) | 3.547 | 49.763 |
International competition | Dummy, 1 if the firm’s most important market is international market | 0.531 | 0.499 |
Formal protection | Dummy, 1 if firm uses registration of design patterns, trademarks, copyright to protect inventions or innovations | 0.085 | 0.279 |
Public funding | Dummy, 1 if firm received public funding for innovation projects | 0.025 | 0.155 |
Sources within the firm or other firms within the group | 4 values, 0, 1/3, 2/3, 1; higher value indicates greater importance | 0.553 | 0.350 |
Competitors as source of information | 4 values, 0, 1/3, 2/3, 1; higher value indicates greater importance | 0.385 | 0.343 |
Customers as source of information | 4 values, 0, 1/3, 2/3, 1; higher value indicates greater importance | 0.519 | 0.365 |
Suppliers as source of information | 4 values, 0, 1/3, 2/3, 1; higher value indicates greater importance | 0.545 | 0.370 |
Lack of appropriate sources of finance | 4 values, 0, 1/3, 2/3, 1; higher value indicates greater importance | 0.404 | 0.396 |
Cost of innovation too high | 4 values, 0, 1/3, 2/3, 1; higher value indicates greater importance | 0.382 | 0.403 |
Lack of qualified personnel | 4 values, 0, 1/3, 2/3, 1; higher value indicates greater importance | 0.362 | 0.378 |
Lack of information about technology | 4 values, 0, 1/3, 2/3, 1; higher value indicates greater importance | 0.232 | 0.298 |
Lack of information about markets | 4 values, 0, 1/3, 2/3, 1; higher value indicates greater importance | 0.237 | 0.307 |
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Masso, J., Roolaht, T., Varblane, U. (2012). Links Between Foreign Direct Investment and Innovation Activities in Estonia. In: Carayannis, E., Varblane, U., Roolaht, T. (eds) Innovation Systems in Small Catching-Up Economies. Innovation, Technology, and Knowledge Management, vol 15. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-1548-0_13
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