Impact of firm heterogeneity on direct and spillover effects of FDI: Micro-evidence from ten transition countries

► This paper presents a comparative study of the importance of FDI spillovers in 10 transition countries, using a common methodology and a large firm-level dataset. ► The main novelty of the paper is the explicit control for various sources of firm heterogeneity when accounting for different effects of FDI on firm performance. ► We find that horizontal spillovers have become increasingly important over the last decade, and they may even become more important than vertical spillovers. ► This work shows that both direct effects from foreign ownership as well as the spillovers from foreign firms substantially depend on the absorptive capacity and productivity level of individual firms. ► Only more productive firms and firms with higher absorptive capacities are able to compete with foreign affiliates in the same sector and to benefit from the increased upstream demand for intermediates generated by foreign affiliates. ► In addition, these results show that foreign presence may also affect smaller firms to a larger extent than larger firms, but this impact may go in either direction.