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Small Business Economics

, Volume 53, Issue 4, pp 935–960 | Cite as

Wage and competition channels of foreign direct investment and new firm entry

  • Marzieh AbolhassaniEmail author
  • Seçil Hülya Danakol
Article
  • 1k Downloads

Abstract

Using a rich data set of the Dutch manufacturing sector between 1995 and 2010, we investigate the effect of foreign direct investment (FDI) on domestic new firm entry. The emerging empirical literature has focused on the direct relationship between FDI and entry, but has not explored the mechanisms behind the observed effect. Drawing on a simultaneous equations model, our analysis features both the direct effect of FDI as well as indirect effects through two channels: industry competition and wages. We estimate the parameters through 3SLS and take into account the endogeneity of competition and wages with respect to entry. Our results show that there is a significant negative direct effect of FDI on entry. At the same time, FDI decreases competition and increases wage levels, which then impact entry positively and negatively, respectively. The total effect of FDI is negative, but small and virtually disappears after one year. Policy implications are discussed.

Keywords

Firm entry Competition Market concentration Wage Foreign direct investment 

JEL Classification

F23 F60 L60 L26 

Notes

Acknowledgments

We wish to thank the editor and two anonymous referees for helpful comments, as well as Utz Weitzel for his valuable suggestions and supervision during the research project. We also gratefully acknowledge financial support from the Dutch Ministry for Economic Affairs and excellent data assistance from colleagues at the Statistic Netherlands (CBS). Any remaining errors are our own.

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Copyright information

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Authors and Affiliations

  1. 1.Faculty of Economics and BusinessUniversity of GroningenGroningenThe Netherlands
  2. 2.Center for Accounting, Auditing and ControllingNyenrode Business UniversiteitBreukelenThe Netherlands
  3. 3.Utrecht School of EconomicsUtrecht UniversityUtrechtThe Netherlands

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