Foreign Direct Investment, Competition and Industrial Development in the Host Country

CORE Discussion Paper No. 2004/11

38 Pages Posted: 28 Mar 2007  

Salvador Barrios

European Commission, JRC - IPTS

Holger Gorg

Kiel Institute for the World Economy; IZA Institute of Labor Economics

Eric Strobl

Ecole Polytechnique, Paris - Department of Economic Sciences; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2004

Abstract

This paper analyses the impact of foreign direct investment (FDI) on the development of local firms. We focus on two likely of FDI: a competition effect which deters entry of domestic firms and positive market externalities which foster the development of local industry. Using a simple theoretical model to illustrate how these forces work we show that the number of domestic firms follows a u-shaped curve, where the competition effect first dominates but is gradually outweighed by positive externalities. Evidence for Ireland tends to support this result. Specifically, applying semi-parametric regression techniques on plant level panel data for the manufacturing sector we find that while the competition effect may have initially deterred local firms' entry, this initial effect has been outpaced by positive externalities making the overall impact of FDI largely positive for the domestic industry.

Keywords: foreign direct investment, spillovers, industrial development, firm entry, semi-parametric estimations

JEL Classification: F2, L6, O1

Suggested Citation

Barrios, Salvador and Gorg, Holger and Strobl, Eric, Foreign Direct Investment, Competition and Industrial Development in the Host Country (April 2004). CORE Discussion Paper No. 2004/11. Available at SSRN: https://ssrn.com/abstract=971409 or http://dx.doi.org/10.2139/ssrn.971409

Salvador Barrios (Contact Author)

European Commission, JRC - IPTS ( email )

Edificio Expo
C/ Inca Garcilaso s/n
Seville, 41092
Spain
34 954 48 82 08 (Phone)
34 954 48 82 08 (Fax)

Holger Görg

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, D-24100
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Eric Strobl

Ecole Polytechnique, Paris - Department of Economic Sciences ( email )

Ecole Polytechnique
Department of Economics
Paris, 75005
France

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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