Firm size and spillover effects from foreign direct investment: the case of Romania

This paper introduces firm size in the analysis of the productivity spillovers of foreign direct investment. Our analysis of a panel of Romanian firms reveals two main findings: only medium-sized foreign firms generate spillovers, and domestic firms’ size is of limited importance to identify which firms absorb spillovers. To explain these findings, we show that large foreign firms are less embedded in the domestic economy because they are more likely to bring their own suppliers, import intermediate inputs and export their output. Smaller foreign firms lack the scale to transmit spillovers to domestic firms. Whereas foreign firms’ size adequately proxies for these spillover mechanisms, domestic firms’ size has an unclear relationship with the different mechanisms.