Inter-industry FDI spillovers from foreign banks: Evidence in transition economies

Using a sample of non-financial domestic firms in transition economies from Eastern Europe and Central Asia, we examine whether and how inter-industry spillovers from FDI in the banking sector occur. Our findings show that the innovation pursued by domestic firms benefits from foreign bank penetration. However, these positive inter-industry spillovers surprisingly (and in contrast to conventional wisdom) do not seem to work through enhanced credit access. Our theory suggests that they may occur through the improvement of the local market of fee-based banking services and the transfer of knowledge to domestic firms in non-contractual interactions. These positive spillovers occur mainly for foreign banks that use relationship lending, domestic firms that do not export, and host countries that are less open to the global market.