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

Author

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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.

Suggested Citation

  • Salvador Barrios & Holger Görg & Eric Strobl, 2004. "Foreign Direct Investment, Competition and Industrial Development in the Host Country: An Analysis for the Case of "White" Certificates," Discussion Papers of DIW Berlin 426, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp426
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    Cited by:

    1. Ebersberger, Bernd & Lööf, Hans, 2004. "Multinational Enterprises, Spillovers, Innovation and Productivity," Working Paper Series in Economics and Institutions of Innovation 22, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    2. Peri, Giovanni & Urban, Dieter, 2006. "Catching-up to foreign technology? Evidence on the "Veblen-Gerschenkron" effect of foreign investments," Regional Science and Urban Economics, Elsevier, vol. 36(1), pages 72-98, January.

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    More about this item

    Keywords

    Foreign direct investment; Spillovers; Industrial development; Firm entry; Semi-parametric estimations;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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    This paper has been announced in the following NEP Reports:

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