The authors acknowledge with thanks the financial support from the Leverhulme Trust under Programme Grant F114/BF. This is a revised version of the paper entitled ‘To Be or Not to Be? Survival of Foreign Firms and Local Productivity Uncertainty’ presented at the 35th Australian Conference of Economists 2006 in Perth, Australia. We thank participants at this conference, the Midwest International Economics and Economic Theory Meetings Fall 2006 at Purdue University, and two referees for their comments.
Market Size and the Survival of Foreign-owned Firms*
Article first published online: 21 AUG 2007
Volume 83, Issue Supplement s1, pages S23–S34, September 2007
How to Cite
FALVEY, R., GREENAWAY, D. and YU, Z. (2007), Market Size and the Survival of Foreign-owned Firms. Economic Record, 83: S23–S34. doi: 10.1111/j.1475-4932.2007.00407.x
- Issue published online: 21 AUG 2007
- Article first published online: 21 AUG 2007
We develop a general equilibrium model with heterogeneous firms and foreign direct investment cost uncertainty and investigate the survival of foreign-owned firms. The survival probabilities of foreign-owned firms depend on firm-level characteristics, such as productivity, and host country characteristics, such as market size. We show that a foreign-owned firm will be less likely to be shut down when its parent firm's productivity is higher and its indigenous competitors are less productive. Although a larger market size will always reduce the survival probability of indigenous firms, it can lead to a higher survival probability for foreign-owned firms if their parent firms are sufficiently productive.