Foreign direct investment and exit of local firms

Foreign direct investment and exit of local firms: Comparison of Exit in Foreign and Local Firms

Foreign direct investment and exit of local firms: Foreign Acquisition and Exit

Foreign direct investment and exit of local firms: Impact of FDI on Exit of Local Firms

Foreign direct investment and exit of local firms: Policy Implications

The exit of local firms refers to the discontinuing of operations by firms owned by local shareholders (i.e., not affiliates of foreign-ownedmultinationals, which represent foreign direct investment, or FDI). This cessation of activities might involve firms closing down completely and exiting the industry, or firms discontinuing their current operations but continuing activities in other guises (e.g., under a new name in the same or a different industry). The former situation is the one more frequently studied and is the focus of this entry. Empirical data showthat firmexit (in the sense of complete shutdowns) is a fairly frequent phenomenon. In a comprehensive overview paper Caves (1998) provides evidence that in the United States around 7 percent of all firms shut down annually, accounting for about 3 percent of market share in the economy.

Economists have long debated whether there is a link between the large and growing activities of foreignmultinationals and the exit of local firms in host countries (e.g., Lall 1978; McAleese and Counahan 1979).The question became evenmore topical at the end of the 20th century with the increasing concern about globalization and the fears this has sparked for domestic economic activity, in particular the jobs associated with it (Barba Navaretti and Venables 2004). There are three interrelated yet distinct parts to this question: first,whether there are differences in exit patterns between affiliates of foreign-owned multinationals and local firms; second, whether a foreign acquisition affects exit probabilities of the local takeover target; and third,whether the presence of foreign-owned multinationals affects, either positively or negatively, the exit and survival prospects of unrelated local firms.

See also agglomeration and foreign direct investment; exchange rates and foreign direct investment; footloose production; foreign direct investment and labor markets; foreign direct investment under monopolistic competition; foreign direct investment under oligopoly; outsourcing/ offshoring; subsidies and financial incentives to foreign direct investment; transfer pricing

FURTHER READING

• Barba Navaretti, Giorgio, and Anthony J. Venables. 2004. Multinational Firms in the World Economy. Princeton, NJ: Princeton University Press. Chapters 7 and 8 pro vide a textbook treatment of the effect of FDI on local firms, also looking at exit of local firms.
• Bernard, Andrew, and Bradford Jensen. 2007. ‘‘Firm Structure, Multinationals, and Manufacturing Plant Death.’’ Review of Economics and Statistics 89: 193 204. Looks empirically at firm exit in the United States and the role of multinationals and ownership change.
• Bernard, Andrew, and Fredrik Sjo¨holm. 2003. ‘‘Foreign Owners and Plant Survival.’’ NBER Working Paper 10039. Cambridge,MA: National Bureau of Economic Research.Anempirical examination of differences in exit rates between foreign affiliates and local firms for In donesia.
• Caves, Richard E. 1998. ‘‘Industrial Organization and New Findings on the Turnover and Mobility of Firms.’’ Journal of Economic Literature 36: 1947 82. A very comprehensive review of the research on firm entry and exit.
• Girma, Sourafel, and Holger Go¨rg. 2004. ‘‘Blessing or Curse? Domestic Plants’ Survival and Employment Prospects after Foreign Acquisition.’’ Applied Economics Quarterly / Konjunkturpolitik 50 (1): 89 110. Empirical study of effects of foreign acquisitions on exit of local takeover targets using UK data.
• Go¨rg, Holger, and Eric Strobl. 2003a. ‘‘Footloose Multi nationals?’’ The Manchester School 71: 1 19. An empir ical examination of differences in exit rates between foreign affiliates and local firms for Ireland.
• . 2003b. ‘‘Multinational Companies, Technology
• Spillovers, and Plant Survival.’’ Scandinavian Journal of Economics 105 (4): 581 95. An empirical investigation of the impact of foreign multinationals on exit of local firms using data for Ireland.
• Lall, Sanjay. 1978. ‘‘Transnationals, Domestic Enterprises, and Industrial Structure in Host LDC’s: A Survey.’’ Oxford Economic Papers 30 (2): 217 48. An early and very comprehensive survey of host country effects of foreign multinationals.
• McAleese, Dermot, and Michael Counahan. 1979. ‘‘Stickers or Snatchers? Employment in Multinational Corporations during the Recession.’’ Oxford Bulletin of Economics and Statistics 41: 345 58. An early discussion of the ‘‘footloose’’ nature of affiliates of foreign multi nationals in host countries.

HOLGER GO¨ RG