Does FDI Facilitate Domestic Firm Entry?

China has undergone a dramatic increase of foreign direct investment (FDI) in the past few decades, and has become the second largest recipient of FDI in the world since 2009. Many studies have shown that FDI has spillover effects on host country’s economy. There are four channels through which FDI can exert technology spillover effects:Demonstration effect, competition effect, linkage effect and training effect (J.H.Zhang et al 2003). Previous studies concerning spillover effect of FDI mainly focused on the demonstration and linkage effects. This paper would provide empirical evidence for the competition effect, discuss.whether and to what extent FDI inflow facilitates market entry of domestic firms. The questions we seek to answer are: whether and to what extent FDI inflow facilitates market entry of domestic firms? If this kind of spillover effect does exist, would it be affected by the characteristics of different industries?Based on industry level data of China’s manufacturing sector during the period from 2003 to 2010, this paper build a fixed effect model to study the question raised above. The estimation results show that generally FDI in China does facilitate firm entry of domestic market, and improves the competition intensity of domestic market. We also investigate whether the capital intensity, enterprise type and regional difference would affect the spillover effect of FDI on domestic firm entry. In terms of capital intensity, FDI exerts a stronger horizontal spillover effect as well as a stronger vertical spillover effect on the domestic firm entry of labor-intensive industries compared with capital-intensive industries. In terms of enterprise type, SOEs’entry rates get the largest horizontal spillover effect form FDI; The quantity percentage of private firms also increases with FDI inflow, while the market share of private firms seems to be "crowed out" by FDI inflow. In terms of regional difference, domestic firm entry in the Eastern area is mainly affected by the horizontal spillover effect of FDI, while domestic firm entry in the central area is mainly influenced by the vertical spillover effect of FDI, but domestic firm entry is affected by neither horizontal effect nor vertical spillover effect of FDI. At last, we provide some policy suggestions based on our study.