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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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  • Salvador Barrios
  • Holger Görg
  • Eric Strobl

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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Bibliographic Info

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
Date of revision:
Handle: RePEc:diw:diwwpp:dp426

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

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References

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  1. Mata, Jose, 1993. "Entry and type of entrant : Evidence from Portugal," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 11(1), pages 101-122, March.
  2. Holger Görg & Eric Strobl, 2003. "Multinational Companies, Technology Spillovers, and Plant Survival," Discussion Papers of DIW Berlin, DIW Berlin, German Institute for Economic Research 366, DIW Berlin, German Institute for Economic Research.
  3. 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, Trinity College Dublin, Department of Economics 20026, Trinity College Dublin, Department of Economics.
  4. Haaland, Jan I & Wooton, Ian, 1999. " International Competition for Multinational Investment," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 101(4), pages 631-49, December.
  5. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 341-59, May.
  6. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, Elsevier, vol. 43(2), pages 335-356, February.
  7. Wolfgang Hardle & Oliver Linton, 1994. "Applied Nonparametric Methods," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1069, Cowles Foundation for Research in Economics, Yale University.
  8. 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.
  9. Barry, Frank & Bradley, John, 1997. "FDI and Trade: The Irish Host-Country Experience," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(445), pages 1798-1811, November.
  10. Acs, Zoltan J & Audretsch, David B, 1989. "Small-Firm Entry in U.S. Manufacturing," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 56(222), pages 255-65, May.
  11. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  12. Gordon H. HANSON, 2001. "Should Countries Promote Foreign Direct Investment?," G-24 Discussion Papers, United Nations Conference on Trade and Development 9, United Nations Conference on Trade and Development.
  13. Gorg, Holger & Strobl, Eric, 2002. "Multinational companies and indigenous development: An empirical analysis," European Economic Review, Elsevier, Elsevier, vol. 46(7), pages 1305-1322, July.
  14. Robert E. Lipsey, 2002. "Home and Host Country Effects of FDI," NBER Working Papers 9293, National Bureau of Economic Research, Inc.
  15. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 9(2), pages 169-189, Spring.
  16. Gorg, Holger & Strobl, Eric, 2001. "Multinational Companies and Productivity Spillovers: A Meta-analysis," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 111(475), pages F723-39, November.
  17. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 605-618, June.
  18. Mata, Jose & Machado, Jose A. F., 1996. "Firm start-up size: A conditional quantile approach," European Economic Review, Elsevier, Elsevier, vol. 40(6), pages 1305-1323, June.
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