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Does FDI affect productivity growth, innovation, and knowledge sourcing activities of domestic firms? This study employs detailed firm-level panel-data from Estonia's manufacturing sector to investigate different channels through which FDI can affect domestic firms. The author uses instrumental variables approach to identify the effects. The author finds no evidence of an effect of FDI entry on local incumbents' TFP and labour productivity growth in the short term. The effect on productivity does not depend on the local firms' distance to the productivity frontier. However, there are positive spillovers on process innovation. The results show significant positive correlation between the entry of FDI in a sector and the more direct measures of spillovers in subsequent periods.
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