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Foreign Direct Investment, Competitive Pressure and Spillovers. An Empirical Analysis of Spanish Firm Level Data

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  • Sembenelli, Alessandro
  • Siotis, Georges

Abstract

A short review of the theoretical and empirical evidence indicates that foreign direct investment (FDI) has the potential to increase the intensity of competition as well as to act as a channel for technology transfers. One would expect, all else equal, an increase in average firm performance following a wave of FDI, as multinational corporations (MNCs) enjoy higher levels of efficiency and have the potential to generate positive spillovers. At the same time, the entry of foreign firms has also been associated with an increase in competitive pressure on the domestic market. Using a large firm level dataset covering all sectors of Spanish manufacturing during the period 1983-96, we disentangle these three effects by estimating a dynamic model of firm level performance, which we proxy by profitability. We find that FDI has a positive long-run effect on the profitability of target firms, but this is limited to firms belonging to R&D intensive sectors. In addition, the results indicate that foreign presence dampens margins. However, this effect appears to be more than compensated by positive spillovers in the case of knowledge intensive industries.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4903.

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Date of creation: Feb 2005
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Handle: RePEc:cpr:ceprdp:4903

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Keywords: competition; efficiency; foreign direct investment; GMM; panel data; technology transfer;

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Citations

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Cited by:
  1. Hugo Rojas-Romagosa, 2006. "Productivity Effects of FDI Inflows: A Literature Review," CPB Memorandum 170, CPB Netherlands Bureau for Economic Policy Analysis.
  2. Gorodnichenko, Yuriy & Svejnar, Jan & Terrell, Katherine, 2014. "When Does FDI Have Positive Spillovers? Evidence from 17 Transition Market Economies," CEPR Discussion Papers 9807, C.E.P.R. Discussion Papers.
  3. Suzuki, Keishun, 2014. "Southern Innovation and Foreign Direct Investment," MPRA Paper 57054, University Library of Munich, Germany.
  4. Gorodnichenko, Yuriy & Svejnar, Jan & Terrell, Katherine, 2007. "When Does FDI Have Positive Spillovers? Evidence from 17 Emerging Market Economies," CEPR Discussion Papers 6546, C.E.P.R. Discussion Papers.
  5. Nuno Crespo & Isabel Proença & Maria Paula Fontoura, 2007. "FDI Spillovers at Regional Level: Evidence from Portugal," Working Papers Department of Economics 2007/28, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  6. Elisa Galeotti, 2009. "Do Domestic Firms Benefit from Geographical Proximity with Foreign Investors? Evidence from the Privatization of the Czech Glass Industry," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 3(1), pages 026-047, March.
  7. Holger Görg & Alexander Hijzen & Balázs Muraközy, 2009. "The role of production technology for productivity spillovers from multinationals: Firm-level evidence for Hungary," CeFiG Working Papers 5, Center for Firms in the Global Economy, revised 01 Feb 2009.
  8. Stefanie A. Haller, 2005. "The Impact of Multinational Entry on Domestic Market Structure and R&D," Economics Working Papers ECO2005/16, European University Institute.

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