Technology Transfer and Productivity Growth in the EU New Member States: Role of Trade and Foreign Direct Investment

This paper studies the contribution of imports and inward foreign direct investment (FDI) as a vehicle of technology transfer onto the EU new member states at both macroeconomic and industry level. The paper takes the effectiveness of the recipient’s utilization into account by constructing a new index, the so-called Effective Absorption (EA) Index, to measure ability to absorb and utilize the foreign technology in the recipient country. Using data from 12 donors and 10 recipients from 1998 to 2009, the study at macroeconomic level indicates that technical spillovers of foreign research and development (R&D) play more crucial role relatively to domestic R&D on total factor productivity (TFP) growth of the new member states. Imports are found as the major vehicle of technical spillovers rather than inward FDI. The study at industry level is conducted by using data from 17 manufacturing industries of 10 donors and 6 recipients during 1998 to 2009. The empirical results also support the findings at country level. The patterns of technology transfer are different across industries. Nonetheless, technical spillovers exhibit significantly high contribution on TFP growth in high-tech manufacturing industries.