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Market Size and the Survival of Foreign-owned Firms

Rodney Falvey (), Sir David Greenaway () and Zhihong Yu ()

Discussion Papers from University of Nottingham, GEP

Abstract: We develop a general equilibrium model with heterogeneous firms and Foreign Direct Investment (FDI) cost uncertainty and investigate the survival of foreign-owned firms. The survival probabilities of foreign-owned firms depend on firm-level characteristics such as productivity and host country characteristics such as market size. We show that a foreign-owned firm will be less likely to be shut down when its parent firm’s productivity is higher and its indigenous competitors are less productive. Whilst a larger market size will always reduce the survival probability of indigenous firms, it can lead to a higher survival probability for foreign-owned firms if their parent firms are sufficiently productive.

Keywords: FDI; heterogeneous firms; market size (search for similar items in EconPapers)
Date: 2007
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