Links Between Foreign Direct Investment and Innovation Activities in Estonia

Abstract

There is a growing literature focusing on analyzing the productivity gap between domestic and foreign firms with differences in innovation indicators. In this chapter, we analyze the relationship between inward and outward foreign direct investment (FDI) at either company or industry level and the innovation behavior of companies in Estonia. We used company-level data from three waves of the Community Innovation Surveys, which were combined with financial data from the Estonian Business Register and FDI data from the Balance of Payments statistics. For the analysis, we used propensity score matching. Our results show that the higher innovation output of foreign-owned companies vanished after controlling for a number of company characteristics, but there were significant differences in innovation inputs, such as the higher use of knowledge sourcing and the lower importance of various impeding factors. Both domestic and foreign-owned firms with outward investments are more innovative.