Does foreign presence induce host country firms’ exit? The case of Portugal

November 1, 2019

Multinational enterprises are a significant contributor to the world economy as evidenced by indicators of foreign affiliate activity such as sales, employment, exports, value added and assets. This paper studies their role as agents of competition using the Portuguese economy. Multinational activities might affect the host country industry dynamics due two main opposing effects. On one hand, the presence of foreign firms may induce less efficient domestic firms to exit the market (a crowding-out effect) through, for example, aggressive business practices of foreign firms (e.g. predatory conduct) or their better access to less expensive inputs. On the other hand, foreign firms may contribute to the transfer of advance knowledge and best practices to local firms, which is reflected in an improvement of domestic firms’ productivity and reduced exit rates. Both effects had been found in prior empirical literature, but their relative importance depends on the countries, sectors and periods of analysis.

This paper estimates an econometric model based on a large sample of Portuguese firms from manufacturing and services over the period 2008–2012. Our work focuses on two different perspectives regarding the effects of foreign presence on domestic firms’ probability of exit. First, we adopt an aggregate perspective studying how the sectorial presence of foreign firms affects the probability of firm exit. We show that foreign presence at the industry level increases a host country firm’s probability of exit from manufacturing sectors, supporting the crowding-out effect. Second, we adopt an individual firm’s perspective by investigating how a local firm’s foreign ownership affects the probability of exit. We show that firms with foreign ownership have a lower probability of exit than purely domestic firms. These conclusions apply to both manufacturing and services sectors.

The paper illustrates the benefit that accrues to firms that are able to internationalize as they become more resilient to international competitive forces in the local market.

Click here to go to the paper by Paula Sarmento and Rosa Forte.