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Foreign direct investment, competition and industrial development in the host country

In: MULTINATIONAL ENTERPRISES AND HOST COUNTRY DEVELOPMENT

Author

Listed:
  • 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 local firms’ entry, this initial effect has been outpaced by positive externalities making the overall impact of FDI largely positive for the domestic industry.

Suggested Citation

  • Salvador Barrios & Holger Görg & Eric Strobl, 2016. "Foreign direct investment, competition and industrial development in the host country," World Scientific Book Chapters,in: MULTINATIONAL ENTERPRISES AND HOST COUNTRY DEVELOPMENT, chapter 18, pages 323-346 World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789814749237_0018
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    References listed on IDEAS

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    More about this item

    Keywords

    Multinational Enterprises; Foreign Direct Investment; Spillovers; Development; Host Country;

    JEL classification:

    • F6 - International Economics - - Economic Impacts of Globalization
    • F0 - International Economics - - General
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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