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

56 Pages Posted: 1 Aug 2006 Last revised: 10 Jul 2010

Multiple version iconThere are 2 versions of this paper

Date Written: August 2008

Abstract

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.

Suggested Citation

Kosova, Renata, Do Foreign Firms Crowd Out Domestic Firms? Evidence from the Czech Republic (August 2008). Available at SSRN: https://ssrn.com/abstract=891776 or http://dx.doi.org/10.2139/ssrn.891776

Renata Kosova (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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