Do Foreign Firms Crowd Out Domestic Firms? Evidence from the Czech Republic
The Review of Economics and Statistics, Vol. 92, No. 4, pp. 861-881, November 2010
Posted: 11 Jul 2010 Last revised: 21 Sep 2011
Date Written: July 10, 2010
This paper analyzes the impact of foreign presence on growth and survival of domestic firms. I separate the two opposing effects of foreign presence: a negative crowding out and positive technology spillovers and further analyze whether the crowding out effect is dynamic, i.e. domestic firms cut production over time as foreign firms grow, or a static effect realized upon foreign entry into the industry. 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 effect: 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. Additional analyses indicate that this positive foreign growth effect represents domestic demand-creation. My estimates also show that all the positive externalities from FDI offset initial crowding out effect already in 2 years. Moreover, I also find that there are no long run benefits from competition of other domestic firms. Further analyses also show that domestic firms in the technologically advanced industries are the primary beneficiaries of technology spillovers.
Keywords: FDI, Firm Growth, Survival, Crowding Out, Technology Spillovers, Transitional Economies
JEL Classification: C33, D21, F23, L20
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