Foreign Direct Investment and Firm Survival in Transition Countries

The opening up of Eastern European markets in the 1990’s represents a good ‘thought experiment’ for how the penetration of foreign firms helps/hinders the domestic firms in more recently liberalizing markets like China. Taking firm level data for a sample of 3,700 and 1,100 domestic firms from the Czech Republic and Estonia respectively for the period 2003-2008, two countries with very different inward FDI profiles, we see that the ‘crowding out’ effect of domestic firms by foreign entrants may have induced overall negative effects for the Czech Republic when Czech local firms were exposed to competition. Conversely, Estonian firms, which had already been subjected to earlier withdrawal of State support and were consequently better able to deal with and profit from foreign firm entry, reported higher survival rates in our estimations with increases in linkages between domestic suppliers and foreign downstream entrants (backward linkages).