Working Paper: CEPR ID: DP4903
Authors: Alessandro Sembenelli; Georges Siotis
Abstract: A short review of the theoretical and empirical evidence indicates that foreign direct investment (FDI) has the potential to increase the intensity of competition as well as to act as a channel for technology transfers. One would expect, all else equal, an increase in average firm performance following a wave of FDI, as multinational corporations (MNCs) enjoy higher levels of efficiency and have the potential to generate positive spillovers. At the same time, the entry of foreign firms has also been associated with an increase in competitive pressure on the domestic market. Using a large firm level dataset covering all sectors of Spanish manufacturing during the period 1983-96, we disentangle these three effects by estimating a dynamic model of firm level performance, which we proxy by profitability. We find that FDI has a positive long-run effect on the profitability of target firms, but this is limited to firms belonging to R&D intensive sectors. In addition, the results indicate 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: competition; efficiency; foreign direct investment; GMM; panel data; technology transfer
JEL Codes: F23; L40; L60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign Direct Investment (FDI) (F21) | Profitability (L21) |
| Presence of multinational corporations (MNCs) (F23) | Profitability (L21) |
| Competitive Pressure (L11) | Profitability (L21) |
| Foreign Direct Investment (FDI) (F21) | Competitive Pressure (L11) |
| Positive Spillovers from foreign presence (F69) | Profitability (L21) |