Origin of FDI and Intra-Industry Domestic Spillovers: The Case of Greek and European FDI in Bulgaria Vassilis Monastiriotis and Rodrigo Alegria* Abstract This paper uses firm-level data to assess the horizontal impact of foreign firm ownership on domestic productivity in Bulgaria. We identify a theoretical tradeoff between technological distance (of domestic versus foreign firms) and internalization capacity (of spillovers) and examine the extent to which this is reflected in the impact on the domestic economy of different types and origins of FDI. Emphasis is placed upon the effects of Greek FDI, which is known to be of a distinctively “regional” character. We find that Greek FDI produces significantly larger positive spillovers, which appear more suitable for the Bulgarian context of transition and economic restructuring. We also unveil some notable “hysteresis” and “technology bias” effects for FDI spillovers of all origins, as well as some country-specific ownership-structure and threshold effects. 1. Introduction There is a general consensus among policymakers that foreign direct investment (FDI) acts as an engine of growth for host economies. Besides the direct effects on capital accumulation and the current account, an important channel for the beneficial effects of FDI is the positive externalities that foreign-owned firms generate in the domestic economy.Although the theoretical basis for such externalities is strong (see Markusen and Venables, 1999), the relevant empirical evidence is rather thin, with the majority of firm-level studies failing to identify robust positive spillovers—see Hanson (2001) or Görg and Greenaway (2004). This has led research to examine more closely the factors that condition the impact of FDI, exploring alternative channels through which FDI may exert an impact on domestic economic performance. This quest has been mainly along three directions. Some studies examine the impact of FDI on economic restructuring (Hunya, 2002) and export performance (Greenaway et al., 2004). A second strand focuses on inter-industry spillovers, i.e. on productivity gains to domestic firms through demand or supply linkages (Javorcik, 2004; Blalock and Gertler, 2008). Finally, a third line of inquiry has sought to identify the factors that condition the impact of foreign firms on domestic productivity within sectors (Gersl et al., 2007; Resmini and Nicolini, 2007). This paper follows this last approach, seeking to provide a systematic examination of the factors that affect the direction (sign) and intensity of horizontal (intra-industry) spillovers from foreign-owned firms in Bulgaria.We focus on Bulgaria for a number of * Monastiriotis: European Institute, London School of Economics, London WC2A 2AE, UK. E-mail: v.monastiriotis@lse.ac.uk.Alegria: Department of Geography, London School of Economics, London WC2A 2AE, UK. E-mail: r.alegria@lse.ac.uk. Part of this work has been funded by the NBG Seed Fund on Southeast Europe, under the auspices of the Hellenic Observatory, LSE. We are grateful to Jacob Jordaan and conference participants at the EEFS conference (Prague, 2008) for useful comments on earlier versions of this paper. Review of Development Economics, 15(2), 326–339, 2011 DOI:10.1111/j.1467-9361.2011.00611.x © 2011 Blackwell Publishing Ltd