Foreign direct investment's effect on host industry competition and productivity in the United States: The influence of initial host industry competition and foreign firm method of entry

How does inward foreign direct investment (FDI) affect host industry competition and host industry productivity? While examining FDI's effect on these two variables, I focus on how the initial level of competition in the host industry and the heterogeneous characteristics of foreign investments alter FDI's effect. Following earlier research's theoretic expectations, I empirically separate FDI's effect into two mechanisms of 'rising competition' and 'technology transfer' using a measure of industry competition, price mark-up. After this separation, I suggest how initial industry competition and method of entry would alter FDI's effect via these two mechanisms.; My empirical setting is US manufacturing for 1987 through 1991 inclusive. I use panel data regression techniques to analyze inward FDI's effect on US manufacturing industries at the 4 digit standard industrial classification (SIC) level. For my dependent variables of change in competition and productivity, I use change in industry price mark-up and total-factor-productivity. Data is drawn from the Compustat data tapes and the Annual Survey of Manufactures.; Overall, I find empirical support for several of my theoretical expectations. First, the initial level of industry competition strongly affects FDI's relationship to host industry competition and productivity. The higher the initial level of competition, the smaller the subsequent rise in industry competition caused by FDI. For the technology transfer mechanism, if the initial level of industry competition is low then host industry productivity increases. In contrast, if the initial level of industry competition is high then host industry productivity decreases. Second, one of three foreign firm method of entry characteristics (distance, size, and entry mode) is significant. Foreign investment distance to incumbents alters FDI's influence upon host industry competition and productivity. Investments located further from incumbent industry raise competition more, and investments located closer to incumbent industry increase technology transfer.