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Foreign Direct Investment, Competition and Industrial Development in the Host Country: An Analysis for the Case of “White” Certificates

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Author Info
Salvador Barrios
Holger Görg
Eric Strobl

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Abstract

This paper analyses the impact of foreign direct investment (FDI) on the development of local firms. We focus on two likely effects of FDI: a competition effect which deters entry of domestic firms and positive market externalities which foster the development of local industry. Using a simple theoretical model to illustrate how these forces work we show that the number of domestic firms follows a u-shaped curve, where the competition effect first dominates but is gradually outweighed by positive externalities. Evidence for Ireland tends to support this result. Specifically, applying semi-parametric regression techniques on plant level panel data for the manufacturing sector we find that while the competition effect may have initially deterred domestic firms’ entry, this initial effect has been outpaced by positive externalities making the overall impact of FDI largely positive in this country.

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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 426.

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Length: 37 p.
Date of creation: 2004
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Handle: RePEc:diw:diwwpp:dp426

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Related research
Keywords: Foreign direct investment; Spillovers; Industrial development; Firm entry; Semi-parametric estimations;

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Find related papers by JEL classification:
F2 - International Economics - - International Factor Movements and International Business
L6 - Industrial Organization - - Industry Studies: Manufacturing
O1 - Economic Development, Technological Change, and Growth - - Economic Development

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  1. Markusen, James R, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-89, Spring. [Downloadable!] (restricted)
  2. Robert E. Lipsey, 2002. "Home and Host Country Effects of FDI," NBER Working Papers 9293, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Görg, Holger & Strobl, Eric, 2002. "Multinational Companies and Indigenous Development: An Empirical Analysis," CEPR Discussion Papers 3325, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Haaland, Jan I & Wooton, Ian, 1999. " International Competition for Multinational Investment," Scandinavian Journal of Economics, Blackwell Publishing, vol. 101(4), pages 631-49, December. [Downloadable!] (restricted)
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  5. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, vol. 43(2), pages 335-356, February. [Downloadable!] (restricted)
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  6. Barry, F & Bradley, J, 1997. ""FDI and Trade : The Irish Host-Country Experience"," Papers 97/13, College Dublin, Department of Political Economy-.
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  7. Mata, Jose & Machado, Jose A. F., 1996. "Firm start-up size: A conditional quantile approach," European Economic Review, Elsevier, vol. 40(6), pages 1305-1323, June. [Downloadable!] (restricted)
  8. Acs, Zoltan J & Audretsch, David B, 1989. "Small-Firm Entry in U.S. Manufacturing," Economica, London School of Economics and Political Science, vol. 56(222), pages 255-65, May. [Downloadable!] (restricted)
  9. Gordon H. HANSON, 2001. "Should Countries Promote Foreign Direct Investment?," G-24 Discussion Papers 9, United Nations Conference on Trade and Development. [Downloadable!]
  10. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany. [Downloadable!]
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  11. Brian J. Aitken & Ann E. Harrison, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, vol. 89(3), pages 605-618, June. [Downloadable!] (restricted)
  12. Jonathan E. Haskel & Sonia C. Pereira & Matthew J. Slaughter, 2002. "Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?," NBER Working Papers 8724, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Gorg, Holger & Strobl, Eric, 2001. "Multinational Companies and Productivity Spillovers: A Meta-analysis," Economic Journal, Royal Economic Society, vol. 111(475), pages F723-39, November. [Downloadable!] (restricted)
  14. Holger G–rg & Eric Strobl, 2003. "Multinational Companies, Technology Spillovers and Plant Survival," Scandinavian Journal of Economics, Blackwell Publishing, vol. 105(4), pages 581-595, December. [Downloadable!] (restricted)
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  15. Frances Ruane & Ali Ugur, 2002. "Foreign Direct Investment And Productivity Spillovers In The Irish Manufacturing Industry: Evidence From Firm Level Panel Data," Trinity Economics Papers 20026, Trinity College Dublin, Department of Economics. [Downloadable!]
  16. Venables, Anthony J, 1996. "Equilibrium Locations of Vertically Linked Industries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 341-59, May.
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  17. Mata, Jose, 1993. "Entry and type of entrant : Evidence from Portugal," International Journal of Industrial Organization, Elsevier, vol. 11(1), pages 101-122, March. [Downloadable!] (restricted)
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