1. ¹Department of Institutional Analysis and Public Management, Bocconi University, Milan, Italy
2. ²Erasmus University, Tinbergen Institute and ERIM, Rotterdam, the Netherlands

Correspondence: E Pennings, Faculty of Economics H13-31, Erasmus University Rotterdam, Burg. Oudlaan 50, Rotterdam 3062PA, the Netherlands. Tel: +31 10 4082166; Fax: +31 104089149; E-mail: pennings@few.eur.nl

Received 11 July 2007; Revised 15 February 2008; Accepted 8 March 2008; Published online 22 January 2009.

Abstract

We develop a simple test to assess whether horizontal spillover effects from multinational to domestic firms are endogenous to the market structure generated by the incremental entry of the same multinationals. In particular, we analyze the performance of a panel of 10,650 firms operating in Romania in the period 1995–2001. Controlling for the simultaneity bias in productivity estimates through semi-parametric techniques, we find that changes in domestic firms' total factor productivity are positively related to the first foreign investment in a specific industry and region, but get significantly weaker and become negative as the number of multinationals that enter in the considered industry/region crosses a specific threshold. These changing marginal effects can explain the lack of horizontal spillovers arising in traditional model designs. We also find these effects to vary between manufacturing and services, suggesting as a possible explanation a strategic change in technology transfer decisions by multinational firms as the market structure evolves.