FDI spill-overs in the Estonian economy: a trade performance analysis

Abstract

The present thesis investigates the hypothesis of FDI export spill-overs from foreign multinationals to domestic Estonian companies by using a dataset comprising both exporters and non-exporters in the manufacturing sectors in a time-span ranging from 1999 to 2009. Estonia is an excellent case study in the field thanks to its historically high levels of FDI per capita. The study assesses both horizontal and vertical spill-overs, distinguishing the latter between backward and forward linkages. It starts by analysing FDI dynamics, previous studies on export spill-overs and the historical evolution of the Estonian economy. A Heckman selection model is then described and employed in order to distinguish between two different decisions, namely whether firms decide to start exporting or not (export-propensity) and how much they export (export-intensity). The results reveal a scarce significance of spill-overs in the decision to engage in exports, but various robustness checks confirm a strong relevance of backward linkages in export-intensity. These externalities seem to be stronger after EU accession. In contrast to the main findings of previous studies, horizontal spill-overs appear generally as insignificant even when controlled for time or technological heterogeneity in the dataset. Contrary to what usually found for developing and transitional markets, export-intensive Estonian firms are both younger and larger firms. This can be seen as a confirmation of successful institutional reforms during the years of transition, especially when integrated with earlier findings on Estonia by Sinani and Meyer (2004).