Does FDI facilitate Domestic Entry? Evidence from the Czech Republic

Abstract

This paper analyzes the impact of FDI on domestic firm entry and firm size distributions in 245 industries in the Czech Republic during 1994 to 2000. We find that larger foreign presence stimulates the entry of domestic firms within the same industry indicating the existence of positive horizontal spillovers from FDI. We also find evidence of significant vertical entry spillovers - FDI in downstream (upstream) industries initiates entry in upstream (downstream) sectors via the presence of backward (forward) linkages. Our results also show that entry spillovers through vertical linkages are stronger than horizontal spillovers. However, these entry spillovers vary substantially across industries: while service industries benefit from both horizontal and vertical spillovers, manufacturing industries do not experience significant positive entry spillovers of any kind. In addition, while vertical spillovers prevail among competitive industries, horizontal spillovers dominate in less competitive industries. We also find that country of origin of FDI matters - horizontal spillovers are driven by FDI from the EU countries. The right skewness of the firm size distributions in industries without FDI further emphasizes an important role of FDI presence for overall industry dynamics.

Keywords: Foreign Direct Investment, FDI spillovers, Firm Entry, Industry Dynamics, Firm Size Distributions

JEL Classification: L1, L6, L8, F2, D24