Foreign Direct Investment and Mark-Up Dynamics: Evidence From Spanish Firms

Abstract

A review of the literature indicates that Foreign Direct Investment has the potential to increase the intensity of competition and to act as a channel for technology transfers. Using a Spanish firm level data set, we disentangle these effects by estimating a dynamic model of firm level performance, which we proxy by mark-ups. We find that FDI has a positive long-run effect on the mark-ups of targets, but this is limited to firms in R&D intensive sectors. In addition, we find weak evidence that foreign presence dampens margins. However, this effect appears to be more than compensated by positive spillovers in the case of knowledge intensive industries.

Keywords: Foreign Direct Investment, Technology transfer, Spillovers, Efficiency, Competition, Panel data, GMM

JEL Classification: F23, L40, L60