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Do Foreign Firms Crowd Out Domestic Firms? Evidence from the Czech Republic

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Renata Kosova (The George Washington University School of Business)
Abstract

This paper analyzes the impact of foreign presence on growth and survival of domestic firms,while separating the two opposing effects of foreign presence: a negative "crowding out" and positive "technology spillovers". I focus on the question whether crowding out effect is dynamic, i.e. domestic firms cut production over time as foreign firms grow in the domestic industry, or a static effect realized upon foreign entry. Using 1994-2001 firm-level panel data for the Czech Republic my results show evidence of both technology spillovers and crowding out effects. However, crowding out appears to be a short-term or static phenomenon: initial foreign entry increases the exit rate of domestic firms. Subsequently, however, the sales growth of the foreign firms in the industry increases both the growth rate and survival of domestic firms. Dividing industries between low and high-export oriented, suggests that this positive foreign effect represents domestic demand-creation rather than export market spillovers. Further analyses also show that domestic firms in the technologically advanced industries are the primary beneficiaries of technology spillovers.

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Paper provided by School of Business, The George Washington University in its series Working Papers with number 0006.

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Date of creation: Mar 2006
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Handle: RePEc:gwu:wpaper:0006

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  1. Elisa Galeotti, 2009. "Do Domestic Firms Benefit from Geographical Proximity with Foreign Investors? Evidence from the Privatization of the Czech Glass Industry," AUCO Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 3(1), pages 026-047, March. [Downloadable!]
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