| Abstract: |
This report summarizes the findings of a research project using firm level
data on Italian and Turkish manufacturing industries. In this project we study
the dynamics of firm survival and growth, and the spillover effects from
foreign-owned to domestic firms. First, we investigate the differences in
survival patterns of foreign-owned and domestic firms and test the hypothesis
that foreign multinational enterprises (FMNEs) display “foot-loose” behavior.
Secondly, we analyse the effects of FDI on the survival and growth prospects
of domestic firms by disentangling horizontal and vertical spillovers. We use
hazard models for the econometric analysis of firm survival and the system-GMM
and Heckman selection models for the analysis of firm (employment) growth. In
the case of Italy, a comparison of survival rates of domestic and foreign
firms shows that foreign firms are more likely to survive than domestic firms,
although the survival rates of foreign firms are not much different than those
of Italian multinational firms. To check for a more general applicability of
this preliminary finding, we estimate the hazard functions for the domestic
and foreign firms, controlling for a number of sector-specific and
firm-specific characteristics. The results reveal that foreign firms are more
“foot-loose” compared to their domestic counterparts while Italian
multinationals exhibit lower hazard rates with respect to both domestic
non-multinational firms and to foreign multinationals. Besides, the foreign
firms’ likelihood of exit compared to domestic firms is higher in sectors with
low technology- and knowledge-intensity. In the Turkish case, the simple
comparison of survival rates also highlights that foreign firms are more
likely to survive than Turkish firms, although the survival rates of foreign
firms are not different from those of large domestic firms. Since foreign
firms usually start with a larger size, use more capital-intensive
technologies, survival rates may reflect the impact of entry characteristics.
The hazard function estimates reveal that, when we control for sector-specific
variables, foreign firms still have higher survival probabilities, but once
firm-specific variables are included in the hazard function model, they appear
more “foot-loose” for the 1983-2001 period. Foreign firms are more likely to
survive than the domestic firms in the 2003-2009 period even after
firm-specific variables are taken into account, but the inclusion of
firm-specific variables reduces the impact of foreign ownership on the
likelihood of survival considerably. These results for Italy and Turkey
indicate that foreign ownership has not necessarily a positive impact on firm
survival. Conversely, there is evidence that multinational experience matters
for survival because multinational firms have larger size and may employ more
capital-intensive technologies thanks to their superior financial strength and
experience in other markets. Other firm-level characteristics (size, skill
level, etc) are also crucial for survival. The exit behavior of foreign firms
is also quite related to the technological environment due to the role played
by opportunity costs, which are more relevant in low-tech industries, and by
sunk investments costs, which (on average) are lower in more traditional
sectors. The mixed results for Turkey across the two periods considered also
highlight the importance of the institutional setting for firm survival and
growth. Turkey experienced two different policy and growth regimes in the
1990s and 2000s. The 1990s, which is labeled by some researchers as the “lost
decade”, is characterized by extreme uncertainty and boom-and-bust cycles,
whereas the Turkish economy achieved a high and stable growth performance in
the 2000s. In terms of industrial policy, the foot-loose behavior of foreign
multinationals should be taken into account in designing investment incentives
to attract foreign multinationals also pursuing sector specific policies and
institutional reforms ensuring that managers have the right incentives to make
long-term investment and to enhance absorptive capacity development. Besides,
to improve the likelihood of firm survival, policy makers should target
firm-specific characteristics that are crucial determinants of performance
gaps in survival, primarily size, productivity and multinational activities.
Concerning the issue of how the presence of foreign firms affects the domestic
firms’ survival and employment growth, our findings suggest that there is a
huge degree of heterogeneity across firms, periods and sectors in both
countries. However, positive evidence in favour of positive spillovers is not
overwhelming. In the case of Italy, the survival of domestic firms is
positively affected by the increased presence of foreign firms within the same
industry, but this only occurs in low- and medium-low tech industries. This
result may be due to the fact that domestic firms in medium-high tech
industries have not enough absorptive capacity to benefit from FDI spillovers.
The relevance of domestic firms’ absorptive capacity for spillover effects is
confirmed by our analysis: only domestic firms that have smaller technology
gap vis-à-vis foreign firms benefit from significant horizontal and vertical
(upstream) spillovers on survival. From the system GMM growth estimates we
find that, in terms of FDI spillovers, there is evidence of a negative impact
on domestic firms employment growth if the foreign firm share in the region
employment increases (negative local spillovers), .and a negative employment
impact for firms with a higher technology gap is detected if the foreign firm
share in the sector increases. For Turkey, the regional share of foreign firms
has a weak negative static impact on the survival rate, and an increase in the
share of foreign firms in a sector also has a negative impact on survival in
the 2003-2009 period. The foreign share of users seems to have positive
coefficients, i.e., domestic firms will be more likely to survive if users are
foreign, but these results are statistically significant only if firm-specific
effects are not controlled for in the 2003-2009 period. Moreover, there is
some evidence of a negative effect on survival if downstream firms are foreign
in the 2003-2009 period. Regarding firm growth, foreign suppliers and change
in regional share of foreign firms have strong negative impact on domestic
firms' growth rates, i.e., those firms supplied by upstream foreign firms, and
those firm operating in regions with an increasing foreign presence experience
lower growth rates. There is also a weak negative impact of sectoral foreign
share on growth whereas a weak positive impact is observed for the change in
sectoral foreign share. These results do not support the broad conclusion that
FDI have positive impact on firms’ indigenous survival and growth dynamics.
Conversely, our findings provide not a favorable picture in terms of the
balance between displacement/competition versus spillover effects of FDI on
domestic firms. We also obtain evidence indicating that the interaction
between the presence of foreign firms and domestic firm survival is markedly
affected by the technological environment that shapes up domestic firms’
absorptive capacity. The displacement effect in dynamic industries implies
that the damage is concentrated on high-tech firms, which should be the higher
quality segment of national production. In terms of industrial policy, this
implies that the desire to encourage FDI and simultaneously building up a
stable supply of indigenous enterprises is more challenging in dynamic
sectors, where a trade-off in terms of these objectives appears to exist. |