Does FDI facilitate Domestic Entrepreneurship? Evidence from the Czech Republic

Renata Kosova and Meghana Ayyagari
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Renata Kosova: The George Washington University School of Business
Meghana Ayyagari: The George Washington University School of Business

Working Papers from School of Business, The George Washington University

Abstract: How does foreign direct investment (FDI) affect industry dynamics? In this paper, we analyze the impact of FDI on domestic firm entry in 245 industries in the Czech Republic during 1994 to 2000. We find that larger foreign presence stimulates the entry of domestic firms within the same industry indicating the existence of positive horizontal spillovers from FDI. We also find evidence of significant vertical entry spillovers – FDI in downstream (upstream) industries initiates entry in upstream (downstream) sectors via the presence of backward (forward) linkages. Our results also show that entry spillovers through forward linkages dominate both horizontal spillovers and spillovers through backward linkages. However, the spillovers vary substantially across industries: while service industries benefit from both horizontal and vertical spillovers, manufacturing industries do not experience significant positive entry spillovers of any kind. In addition, we find that while vertical spillovers prevail among competitive industries, horizontal spillovers dominate in less competitive industries. We also find differences in firm size distributions between industries with and without FDI, further suggesting the influence of FDI presence on industry dynamics.

Date: 2006-09
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