Review of Industrial Organization 22: 67–84, 2003.
© 2003 Kluwer Academic Publishers. Printed in the Netherlands.
Does Foreign Direct Investment Crowd Out
KOEN DE BACKER
Katholieke Universiteit Leuven and Universitat Pompeu Fabra, Barcelona
Katholieke Universiteit Leuven, Vlerick Leuven Gent Management School and Erasmus
Abstract. In analyzing ﬁrm entry and exit across Belgian manufacturing industries, this paper
presents evidence that import competition and foreign direct investment discourage entry and stimu-
late exit of domestic entrepreneurs. These results are in line with theoretical occupational choice
models that predict foreign direct investment would crowd out domestic entrepreneurs through
their selections in product and labor markets. However, the empirical results also suggest that this
crowding out effect may be moderated or even reversed in the long-run due to the long term positive
effects of FDI on domestic entrepreneurship as a result of learning, demonstration, networking and
linkage effects between foreign and domestic ﬁrms
Key words: Entrepreneurship, entry/exit, FDI.
JEL Classiﬁcations: F23, L10, M13.
Since Orr’s (1971) inﬂuential work on entry in Canadian manufacturing, an ex-
tensive literature has emerged studying ﬁrm entry and exit,
as commonly used
Author for correspondence: Naamsestraat 69, 3000 Leuven, Belgium, E-mail:
The authors would like to thank H. Bowen, J. L. Mucchielli, R. Veugelers and one anonymous
referee for useful comments on earlier versions of this paper.
Financial support of Belgian Federal Government (DWTC-project SE/01/003 on “Delocalization of
activities in Belgium” and DWTC-project on “Globalization and social cohesion”) and K.U.Leuven
(Onderzoeksfonds-project OT/96/03 on “Firm and industry dynamics”) and European Commission
(TMR-project ERBFMRXCT98-0215 on “Foreign Direct Investment and the Multinational
Corporation: New Theories and Evidence”) is gratefully acknowledged.
Notwithstanding previous research has produced a diversity of operational approaches of en-
trepreneurship reﬂecting the lack of convergence in the literature toward a single deﬁnition of
entrepreneurship, we adopt the conventional use in the literature of entry rates as representing the
extent of entrepreneurial activity.