Do Vertical Spillovers from FDI Lead to Changes in Markups? Firm-level Evidence from Hungary

Applied Economics Quarterly (formerly: Konjunkturpolitik), 2007, vol. 53, issue 2, pages 197-218

Abstract: This study analyses the relationship between foreign presence and price-cost margins of domestic competitors, and the inter-industry effect, e.g. the effect of foreign entry on domestic firms in supplier industries. By controlling for productivity and input demand, I try to distinguish empirically between theoretical explanations. For this exercise a large panel of Hungarian firms is used consisting of data for 1995-2003. Besides fixed effects, I use dynamic panel models to handle the persistence of price-cost margins and the possible endogeneity of explanatory variables. The empirical results show in a robust way that the effect of FDI on domestic competitors is strong and negative. The effect of foreign presence on supplier industries seems to be positive. Productivity change appears to be an important determinant of markup change, but foreign presence remains significant even after controlling for productivity change.

Keywords: price-cost margins; productivity; foreign direct investment; inter-industry effects (search for similar items in EconPapers)
JEL-codes: F23 L25 (search for similar items in EconPapers)

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Applied Economics Quarterly (formerly: Konjunkturpolitik) is edited by Christian Wey and Klaus F. Zimmermann

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