Do Foreign Firms Crowd Out Domestic Firms? The Evidence from the Czech Republic

Work in progress, comments are welcome. 1I want to thank for an extraordinary help to my comittee chairs: Prof. Francine Lafontaine and Prof. Jan Svejnar and for valuable comments, suggestions and support to Professors: Kai-Uwe Kűhn, Joanne Oxley, and Katherine Terrell. I also thank very much for comments to Peter Katuščák, David Greenstreet and Rasťo Novák for excellent research assistance. In addition, I would, like to thank Cristina Negrut, William Davidson Institute and Kresge Library for data access. I analyze the effect of foreign firm presence on the growth and survival of domestic firms. I separate the two opposing effects that foreign firms may have on domestic firms: a negative “market stealing or crowding out ” effect and a positive “technology spillover ” effect. Unlike pre-vious studies, which analyzed spillovers by estimating firm production functions, I use a model that combines a dominant firm/competitive fringe framework with a model of firm and industry dynamics (Jovanovic,1982 and Sun, 2002). In my model, foreign firms as a group are represented by the dominant firm and domestic firms form a competitive fringe. As in Jovanovic (1982), do-mestic firms face uncertainty about their production efficiency and learn about it while operatin