This note examines the relationshipbetween the presence of foreign firms and TFP growth ofdomestic firms (called FDI spillovers) in Serbia over2005-2016 period. The analysis finds evidence of FDIspillovers in Serbia like domestic firms on average enjoyhigher productivity because of the presence of FDI firms inthe economy. Moreover, domestic firms that supply to FDIfirms, or are located in the same industry as FDI firms,enjoy higher productivity presumably stemming fromtechnology transfer, higher quality standards, or highercompetition. However, productivity of domestic firmssourcing from industries with a large share of FDI firmsfind their productivity reduced, presumably due to mark-upsby foreign firms. The effect of FDI on productivity ofdomestic firms also varies by firm size and industry. Smallfirms benefit more from spillovers associated with backwardlinkages (when they supply to and FDI firm) but are worseoff with more horizontal FDI (when they compete with FDIfirms in the same industry). Firms in high-tech industriesbenefit more from horizontal and backward FDI spillovers butthere is no effect for firms in low-tech industries. Lastly,firms in transport manufacturing industry do not enjoy anyFDI spillovers from foreign firms in their industry. Thegovernment therefore can do more to ensure that domesticfirms, especially small and medium firms and those inlow-tech industries, benefit from FDI throughentrepreneurship and innovation programs. Such programs caninclude export readiness and export coaching programs, whichwill improve the export performance of domestic firms andstrengthen linkages with foreign firms in the country, andsupplier linkages programs that can provide technicalassistance to domestic firms and information to foreignfirms about potential domestic suppliers. In addition,programs targeted toward increasing innovation andtechnology adoption of domestic firms can help them toachieve high enough productivity levels to be able to absorbFDI spillovers.
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