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

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.