FDI Linkages in Serbia

This note examines the relationship between the presence of foreign firms and TFP growth of domestic firms (called FDI spillovers) in Serbia over 2005-2016 period. The analysis finds evidence of FDI spillovers in Serbia like domestic firms on average enjoy higher productivity because of the presence of FDI firms in the economy. Moreover, domestic firms that supply to FDI firms, or are located in the same industry as FDI firms, enjoy higher productivity presumably stemming from technology transfer, higher quality standards, or higher competition. However, productivity of domestic firms sourcing from industries with a large share of FDI firms find their productivity reduced, presumably due to mark-ups by foreign firms. The effect of FDI on productivity of domestic firms also varies by firm size and industry. Small firms benefit more from spillovers associated with backward linkages (when they supply to and FDI firm) but are worse off with more horizontal FDI (when they compete with FDI firms in the same industry). Firms in high-tech industries benefit more from horizontal and backward FDI spillovers but there is no effect for firms in low-tech industries. Lastly, firms in transport manufacturing industry do not enjoy any FDI spillovers from foreign firms in their industry. The government therefore can do more to ensure that domestic firms, especially small and medium firms and those in low-tech industries, benefit from FDI through entrepreneurship and innovation programs. Such programs can include export readiness and export coaching programs, which will improve the export performance of domestic firms and strengthen linkages with foreign firms in the country, and supplier linkages programs that can provide technical assistance to domestic firms and information to foreign firms about potential domestic suppliers. In addition, programs targeted toward increasing innovation and technology adoption of domestic firms can help them to achieve high enough productivity levels to be able to absorb FDI spillovers.