The impact of FDI on host countries: the analysis of selected service industries in the Visegrad countries

Abstract

Foreign direct investments are substantial in the services sector in the Visegrad countries. In this article, we analyse the impact of FDI on the host economy in four selected service industries in two areas: export and employment. FDI in the four selected service industries differ in terms of their vertical or horizontal nature: in business services FDI is predominantly vertical; in financial services and telecommunications it is predominantly horizontal; while in computer-related service activities both types can be found. According to our results, the impact on the host economy differs in the four service industries. We found a positive and significant impact on exports in vertical business services and in horizontal telecommunications services, and on employment in business services and, to a lesser extent, in financial services. The positive impact either diminished or disappeared during the global recession of 2008–2009. The comparison of the four Visegrad countries demonstrates the heterogeneous intensity and significance of this impact, indicating their different specialisations in the analysed services industries.

Keywords:

• Vertical and horizontal FDI
• service industries
• impact on the host economy
• Central and Eastern European economies

Acknowledgements

The authors are grateful to the reviewers and to Richard Connolly for their comments and suggestions on an earlier version of the article.

Notes

1. Other approaches rely on industry-level characteristics; for example, in Görg, Mühlen, and Nunnenkamp (2009) the horizontal–vertical distinction is made on patterns of bilateral trade between Germany and the Czech Republic, using Revealed Comparative Advantages (RCA) of the given industry. Where the destination country has a positive RCA, vertical FDI is assumed.

2. Markusen (2002) underlines that vertical FDI is traditionally used by MNEs to carry out unskilled labour-intensive processes. This obviously refers mainly to manufacturing industries. Furthermore he also emphasises the fact that horizontal FDI can contain vertical elements and vice versa.

3. We opted for using a ‘harmonised’ database, compiled by international organisations, as in these, data from national sources are ‘double-checked’ and made comparable and longer time series are available. Another option was to rely on national statistics, however, here many data were missing, and longer time-series were not available.

4. There are other approaches for analysing the impact of FDI on export and/or employment. For example, Chakraborty and Nunnenkamp (2008) use panel cointegration methods to analyse the effect of FDI on GDP growth in India for various sectors, which is a promising alternative against panel modelling.

5. See, for instance, http://www.czechinvest.org/en/ict or Hardy et al. (2011), while, in line with our results, Půžová and Marešová (2014) mention lower levels of sales and export of computer services in Czechia than in the telecommunications sector.