(Foreign Direct Investment and the Entry of New Firms)

Abstract

As one of the numerous merits brought by global financial integration, foreign direct investment (FDI) plays an indispensable role in fostering economic growth in the developing world. Different from previous literatures which concentrate on discussing the FDI productivity spillover effect, the paper provides evidence of the impact from FDI on the entry of new-born private firms by employing an exhaustive Chinese firm-level dataset. The paper confirms the vintage positive productivity spillover from FDI. It further suggests that larger share of foreign owned enterprises correlates significantly with less entry of new private firms in a given industry. Considering the vital role of new-born firms in facilitating private sector development, which in turn is crucial to sustainable economic growth, the paper recommends relevant authority carefully assessing the trade-off between positive productivity spillover effect and negative entry inhibition effect, before introducing more favored policies to attract foreign investors