Bruno Merlevede, Victoria Purice, 29 March 2019

Supplying inputs to multinational firms has been shown to increase the productivity of domestic firms, while borders have been shown to substantially reduce trade activities. This column investigates whether spillover effects from multinationals on local firms occur when firms are separated by a national border. Using data for seven Central and Eastern European countries and their neighbours, it finds that cross-border spillovers only occur after EU integration, and that participation in the Schengen Area magnifies these effects. The results bear testimony to successful EU integration and warn about potential productivity costs to local firms should border controls be reinstated.

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