We do not find evidence for a pure spillover effect when other channels are controlled for. On other hand, we find evidence of the change in sourcing patterns in that MNEs entering the upstream industry replace domestic firms or domestic suppliers may be replaced by imports of upstream goods. Specifically, we show that because of higher productivity in sectors that host entering MNEs, the demand for intermediary goods rises, which is positive for suppliers of these goods. Unfortunately, the extent to which domestic suppliers benefit from this increased demand is limited by increased competition with other MNEs operating in the sector of intermediary goods, which are preferred by MNE’s customers and substitute the domestic production. In countries of Eastern Europe, this substitution effect is further intensified by increased competition with importers. On the other hand, those domestic firms, that are able to withstand this double competition, receive additional benefits stemming from their interaction with downstream MNEs in the form of productivity spillovers.
Further, we document the existence of trade (export) spillovers and show that increasing exports of upstream goods are linked to increased production of domestic suppliers of these goods as well. The effect might materialize either because of the newly opened trade channels or because of the aim to target new foreign markets. In both cases the MNEs presence is behind the finding.
We conclude that the presence of the MNEs and their FDI in Europe substantially impacts domestic firms. The impact is not always beneficial at first sight because MNEs presence often crowds-out domestic suppliers. However, the existence of positive production and trade spillovers is overwhelming.