Fdi Impact on Firm Performance

Topics: 1976, 1975, 2007 Pages: 7 (2258 words) Published: April 6, 2013
Research Topic: FDI Impact on Firm Performance

Research Question: Impact of Inward FDI on Firm Performance across Sectors: Evidence from Uzbekistan

Research Objectives:
• Determine the link between inward FDI and performance of domestic companies in Uzbekistan • Distinguish between vertical and horizontal spillover effects of FDI in firm performance • Develop hypothesis and test it to estimate the strength of impact of inward FDI on specified economic variables • Make policy recommendations on how the research findings can be implemented along with other existing policies in Uzbekistan

Literature Review

There have been many pieces of research undertaken in this area, namely, area of FDI. Vernon (1966) and Caves (1974) cited in Yasar and Morrison Paul (2007) propose that transnational companies (TNC) perform better that domestic companies in developing economies. According to United Nations Conference on Trade and Development (UNCTAD) Investment Policy Review (1999) the Uzbek government authorities are eager to attract FDI for the reason named below thus proving why FDI is important for the economies like Uzbekistan. At the time of USSR Uzbekistan was mainly supplier of raw materials thus becoming low value added commodity producer. So, neither technological advancement nor skills development took place for the existing industries. Nowadays the government priority is to promote FDI in primary sectors such as agricultural, mineral and hydrocarbon production as well as production of pharmaceuticals and medical equipment. It also aims at development of manufacturing advanced technology equipment, including computing, telecommunications and growth of services sector such as tourism industry. According to the data provided by UNCTAD (2002) in its FDI in Brief: Uzbekistan, FDI stock continued to increase in primary sector in particular mining being the largest receiver of FDI. By the year of 2002 “the three largest affiliates of foreign TNCs in Uzbekistan in 2002 came from the United Kingdom, the Russian Federation, and Turkey, while the three largest foreign services affiliates came from the Russian Federation, Switzerland and the United States”. Based on UNCTAD FDI/TNC Database annual average of FDI flow to Uzbekistan was 207.1 mln USD for the period 1999-2002, while FDI stock reaching at 1,331.6 mln USD which is 13.8% of 2002’s GDP value. As FDI is a country level objective for many developing economies much research has been undertaken to evaluate FDI including its impact on firm performance across sectors. In most papers and literatures terms such as horizontal FDI and vertical FDI are differentiated. Referring to Azizov (2007) export oriented FDI where the cost of factors matter most is called vertical FDI. Unlike to vertical FDI horizontal FDI is a market seeking FDI where investor aims at serving local markets. Referring to the research of Akulava and Vakhitova (2010) whose research paper estimates the impact of FDI on Ukrainian firms, the authors conclude that FDI positively affect firm performance in all sectors and they also prove that especially in primary sector foreign entities are much efficient compared to local companies, that in secondary – manufacturing sector the horizontal FDI effect is quite significant. Impact of FDI is significant not only in developing but in developed economies as well. Gazaniol, Peltraut and Siroen (2009) come to the same conclusions that multinational companies outperform domestic companies. In New Zealand foreign owned firms better perform than domestic firms (Zou 2010). The productivity gap is notably significant in services sector compared to the rest of the sectors. Although the results of previous researches can be applied to Uzbekistan’s case to limited extent[1], it is important to estimate true impact of FDI impact on firm performance in order to be efficient and for policy recommendations as in Uzbekistan attracting FDI is one of the main country...
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