The Influence of Domestic Firms on Foreign Direct Investment Liberalization

Abstract:     
This paper investigates the influence of incumbent firms on the decision to allow foreign direct investment into an industry. Based on data from India's economic reforms, the results suggest that firms in concentrated industries are more successful at preventing foreign entry, that state-owned firms are more successful at stopping foreign entry than similarly placed private firms, and that profitable state-owned firms are more successful at stopping foreign entry than unprofitable state-owned firms. These results continue to hold when we control for industry characteristics such as the presence of natural monopolies and the size of the workforce. When foreign entry is allowed in an industry, incumbent firms experience a significant decline in market share and profits. The pattern of foreign entry liberalization supports the private interest view of policy implementation.

Number of Pages in PDF File: 40

Keywords: FDI, liberalization, political economy, state-owned firms

JEL Classification: G3

working papers series