Research Economic Seminar: FDI spillovers in Greece and the role of local absorptive capacity

This paper examines the role of foreign direct investment (FDI) for domestic firms’ productivity and the importance of local financial development in determining the impact of FDI on firms’ productivity in Greece. More specifically, this paper explores the accrual of FDI productivity spillovers for domestic firms in Greece for the years 2006-2015. By using panel data methods and an augmented production function with FDI as an additional regressor, the paper has shown that FDI spillovers are reinforced when the geographical area is smaller, especially for Greek Small and Medium Enterprises (SMEs). In addition, by testing the role of local financial development as potential channel of transmission of FDI spillovers to the local economy, the paper adds value to the existing literature of FDI spillovers, by initiating a discussion about the geography of finance as a new component of local absorptive capacity. Accounting for firm heterogeneity and using an interaction term, it is shown that local financial development can play a crucial role in enhancing FDI productivity gains, especially for small-sized firms.