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 inten-sity of competition as well as to act as a channel for technology transfers. One would expect, all else equal, an increase in average productivity fol-lowing a wave of FDI, as multinational corporations (MNCs) enjoy higher levels of e¢ciency. At the same time, the entry of foreign …rms has also been associated with an increase in competitive pressure on the domestic market. Using a large …rm level data set covering all sectors of Spanish manufacturing during the period 1983-1996, we attempt to disentangle these two e¤ects by estimating a dynamic model of …rm level pro…tabil-ity. We …nd that FDI has a positive long-run e¤ect on the pro…tability of target …rms, but this is limited to …rms belonging to R&D intensive sectors. In addition, the results indicate that foreign presence dampens margins. However, this e¤ect appears to be more than compensated by positive spillovers in the case of knowledge intensive industries