Bring the Boys Back Home: The Impact of Foreign Divestments on Local Firms

Divestments by foreign multinationals are an important phenomenon that is largely neglected in the literature. We use firm‐level panel data from China to estimate the impact of such divestments on the performance of domestic firms in the local economy. To the best of our knowledge, there is no empirical study that has looked at these effects. Our results suggest that, overall, domestic firms may be able to benefit from divestments by foreign firms through spillovers. We find evidence suggesting that the positive overall effect for private firms is driven by the movement of workers from the divested firm to the local firm, as well as by a reduction in competition reducing crowding out. By contrast, local firms are negatively affected by the loss of technology transfer and customer–supplier relationships with foreign firms. While most effects are short‐lived, the negative impact on technology transfer persists over time.