The Impact Of Fdi On Firm Survival And Employment: A Comparative Analysis For Turkey And Italy

Using firm level data on Italian and Turkish manufacturing industries we investigate the differences in survival patterns of foreign owned and domestic firms testing the hypothesis of foreign multinational enterprises (FMNEs) 'foot-loose' behavior (in line with seminal studies such as Görg and Strobl, 2003, Mata and Portugal, 2002). Furthermore, we investigate the effects of FDI on domestic firms following the literature on the transmission of technological and pecuniary FDI externalities to domestic firms survival (Görg and Strobl, 2003; De Backer and Sleuwaegen, 2003; Burke, Görg and Hanley, 2008; Girma and Gong, 2008; Bandick, 2010; Wang, 2010; Kosovà , 2010). In line with the theoretical work by Helpman et al. (2004) we consider the heterogeneity of both MNEs and domestic firms (global engagement, firm and sector dimension, productivity, market concentration, R&D intensity and so on). In the second step of our analysis we explore how the presence of FAs affects the domestic firms' survival and employment growth disentangling horizontal and vertical spillovers. Foreign establishments are likely to intensify competition, and may force domestic firms go out of the market (Caves, 1974; Blomström and Sjöholm, 1998). However, domestic firms may also benefit from technological and pecuniary spillovers from foreign establishments, and become more competitive in domestic and in international markets, although this is more likely to happen in the long run. We ask whether indigenous plants tend to have shorter lives (more deaths) due to competition of FDI affiliates operating in the same industry and whether there are technological/knowledge/pecuniary externalities on firms' survival stemming from the presence of foreign multinationals in the same sectors and in upstream and downstream industries acting as input suppliers and customers. We also check whether the impact of FAs on domestic firms varies with the technological intensity of production and with technology gap between domestic and foreign firms. Hence, our analysis also provides a test for the firm absorptive capacity, which has been largely investigated with respect to FDI spillovers on productivity (Findlay, 1978, Wang and Blomstrom, 1992; Glass and Saggi, 1998; Jordaan, 2008; Jabbour and Mucchielli, 2007 among the others). We explore these issues both for firms' survival and for employment growth by using respectively hazard models and GMM system estimates. Italy and Turkey over the last years entered a process of progressive increase in FDI starting from very low levels. Therefore, it is worth exploring whether and how Italian and Turkish firms survival rates were affected by the increased foreign presence and whether domestic firms have been able to gain positive externalities from the increasing presence of foreign firms. The mixed results for Turkey and Italy are expected to highlight the importance of the institutional setting for firm survival and growth.