Does FDI crowd out domestic firms? Micro-level evidence from the Republic of Korea

Abstract

Purpose The purpose of this paper is to investigate the impact of the foreign investment on the exit and sales of the domestic firms. Furthermore, it studies whether domestic firms undergo different influences by foreign firms according to the size of domestic firms. Design/methodology/approach Korean firm-level data for the period of 2006 through 2013 provided by Statistics Korea are used to study the impact of the foreign investment on the exit and sales of the domestic firms. Findings The result shows that foreign firms crowd out small firms from the market and take their shares in the domestic market. On the other hand, larger firms rather enjoy positive spillover effect from foreign firms, reducing its exit probability and increasing sales. It may be that large firms have enough competitiveness and ability to learn and apply the advanced technology of the foreign firms. Practical implications Despite the strong belief on the positive impacts of the foreign firms such as knowledge spillovers or job creation, there might be crowding-out or market-stealing effect from the presence of foreign firms. If the latter effect is larger than positive effect, the incentives provided by host country government to the multinational firms cannot be justified. In this regard, the question addressed in this paper is very important. Originality/value While most of previous papers have focused on the impacts of the foreign firms on productivity of the domestic firms, this paper deals with their impacts on the exit and sales of the domestic firms in order to examine more direct crowding-out and market-stealing effect of foreign firms.