Foreign Direct Investment, Competitive Pressure and Spillovers. An Empirical Analysis on Spanish Firm Level Data

Abstract

Foreign Direct Investment, Competitive Pressure and Spillovers.An Empirical Analysis of Spanish Firm Level Data* 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.JEL Classification: F23, L40 and L60

Linking FDI motivation and host economy productivity effects: conceptual and empirical analysis

“…In principle the technological laggard is also in a poor position to compete with local or other foreign firms, and therefore market stealing would appear to be an unlikely outcome from this type of FDI. For this reason Sembenelli and Siotis (2002) conclude that 'pure' technology sourcing (i.e. Type 2 FDI) is likely to leave competitive conditions unchanged, and so the likely net effect on domestic productivity is zero.…”

When Does FDI Have Positive Spillovers? Evidence from 17 Transition Market Economies

“…However, the relationship between horizontal spillovers and competition may not be uniform. For example, Sembenelli and Siotis (2002) The business environment may also affect the quality of FDI brought into a country and hence spillovers. Foreign affiliates in better business environments are likely to bring with them better technology as they are more able to maximize profits and hence have more to spill.…”

The Market Disciplining Effects of FDI: Does the Mode of Entry Matter?

“…The definition of price-cost margin assumes a constant marginal cost and therefore the numerator of PCM is equal to the value of output minus variable costs, so price-cost margin contains also fixed costs, like the cost of capital and advertising expenses. To neutralise 9 For example Sembenelli and Siotis (2005) include both, or just market share, Feeny et al (2000) include both. 10 We preferred this simple measure of labour productivity instead of estimating the more complex total factor productivity since TFP is difficult to measure and there is no consensus on which is the optimal way of estimating it.…”

“…Based on this prediction, we then carry out an empirical analysis using data for manufacturing plants in the UK over the period 1991-2001. Although there is a recent buoyant literature on the effects of FDI, in particular on productivity and technological spillovers of domestic firms (Görg and Greenaway, 2004), there is little investigation of the direct effects of FDI on price-cost margins (used in the empirical literature to gauge the degree of competitiveness in an industry or market). To the best of our knowledge only two studies [Co (2001) for the US and Sembenelli and Siotis (2005) for Spain] have addressed this issue in any detail. Co (2001) makes the distinction between grenfield and non-greenfield FDI, but is only able to use aggregate industry level data.…”

“…Co (2001) makes the distinction between grenfield and non-greenfield FDI, but is only able to use aggregate industry level data. By contrast, Sembenelli and Siotis (2005) use firm-level data but only consider aggregate FDI, not distinguishing the two forms of investment. Our paper circumvents the shortcomings of these papers by using plant-level data, which is arguably the most appropriate unit of observation for this type of study, and distinguishing between greenfield and acquisition FDI.…”