Spillover effects: A challenging public interest to measure

Abstract

<abstract> <p>Spillover effects represent a difficult-to-measure externality resulting from the localization of foreign capital in the host economy. Despite their character of externality, spillover effects represent a public interest. The governments of many transitional economies spend financial resources in the form of investment incentives to support economic growth and spillover effects from the inflow of foreign direct investment (FDI). However, there is still no established methodology for regularly measuring spillover effects. This article tries to fill this gap. It aims to measure the spillover effects of FDI localization in the host business environment with the possibility of identifying differences in their size and development on the level of regions within the host economy — in the case of the Czech Republic. Based on shift-share analyses, an indicator quantifying the size of the technology gap at the regional level has been constructed. The benchmarking method illustrates the absorption capacity of the business environment in an interregional comparison reflecting the strong and weak sides of the regions in terms of absorbing the benefits of locating multinational corporations in their territories. The spillover effect was evaluated based on five criteria: gross value added (GVA), technology gap level, investment in research and development (R&amp;D), share of people with secondary and higher education and inflow of FDI. The higher the value of the constructed Spillover index achieved in the region, the higher the positive effect of FDI on economic development. The spillover effects were evaluated within the years 2002–2021 and assessed the impact of 211 FDI on the economic development of five regions of the Czech Republic. Calculations showed that the strength and magnitude of spillover effects fully reflect the weaknesses of peripheral regions. The methodology offers policymakers a tool (indicator) for improving the targeting of institutional support in relation to economic growth and the development of the business environment.</p> </abstract>