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Openness, Firms, and Competition

Title: Openness, Firms, and Competition
Author: Mary Hallward-Driemeier
Pub. Date: June 30, 2001
Full Text: Adobe Acrobat (PDF) [180 KB]

This paper examines the impact of greater foreign competition on domestic firms. Particular attention is paid to dynamic benefits, such as technology spillovers, improved inputs and learning by exporting. While greater foreign direct investment and import competition can be associated with adjustment costs and an increase in the turnover of firms particularly in the short run, the cumulative benefits from greater allocative efficiency and spillovers can be substantial. A number of important lessons are drawn to maximize the potential for beneficial outcomes. To complement openness to foreign competition, attention must be paid to the domestic investment climate. This will facilitate the adjustment process and the entry of new, more productive firms. The speed of adjustment can be accelerated and the costs minimized, the less distortions and barriers to movement there are in factor markets and barriers to entry more generally. Strong domestic competition and well functioning regulations both decrease the risks of new foreign monopolies, while also increasing the ability of local firms to benefit from spillovers from the larger foreign presence in the economy. Openness itself can also be important for realizing benefits. Open trade policy reduces the risk that MNCs will be able to exert local monopoly power. And, foreign provision of services can strengthen key elements of the investment climate, broadening the ability to absorb the benefits of greater liberalization.

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