Analysing Foreign Direct Investment Externalities in the Central Eastern European Region: Evidence from the Hungarian food industry

Abstract

This thesis examines the effects of Foreign Direct Investments (FDI) in the CEE region. The focal point of this thesis is to find out whether a positive relationship exists between the inflow of FDI and regional economic growth. To accomplish this, the relationship between growth in FDI and productivity growth is tested in three CEE countries, i.e. Poland, Hungary and Romania, divided in 31 NUTS II regions. Furthermore a case study of the Hungarian food sector is conducted to get a better understanding of the linkages between foreign affiliates and domestic companies.

Overall, no positive relationship between FDI and productivity growth in the CEE countries has been found. In fact, the results illustrate that the growth in foreign affiliates correlates negatively with productivity growth. Foreign affiliates seem to have a competitive edge over domestic companies. However, this has not led to significant learning effects from vertical spillovers. Furthermore, knowledge spillovers may also occur through imitation even though companies are not always willing to share their knowledge with competitors. Knowledge spillovers may not be the most important externalities that derive from foreign affiliates in the Hungarian food sector. The effect of foreign affiliates is more or less intangible. With their presence they provide the incentives through competition and rising demands for the host economy to develop into a mature market.