Foreign Direct Investment and the Markup Size in Slovenian Manufacturing Firms

The aim of this paper is to investigate the impact of FDI on performance of Slovenian manufacturing firms and the level of competition in manufacturing industries by examining how foreign firms’ entry and their presence affect the incumbent firms’ markup size. The paper uses dataset that covers the whole population of Slovenian manufacturing firms and explicitly considers the initial market structure and the strength of competition as a factor that determines the magnitude and the nature of the FDI impact on performance of domestic firms and on industries’ competitive process. Results based on the dynamic panel model estimates confirm the presence of the competition effect of inward FDI, but also show that the effects of foreign firms’ entry and activity on domestic firms’ performance and the nature of the induced competitive process depend strongly on the initial industry market structure. No evidence of the horizontal productivity spillover effects is found. The significant impact of the concentration of foreign firm activity within industry and in the same region (regional spillover effects) suggests that geographical proximity plays an important role in ability of local firms to benefit from foreign firms presence. Results also show that the inter-industry productivity spillover effects are most pronounced in the medium concentrated industries.