Trade Adjustment Costs in Developing Countries: - World Bank ...

14New Kids on the Block:Adjustment of Indigenous Producersto FDI InflowsBEATA S JAVORCIK1. INTRODUCTIONThe past several decades have witnessed a spectacular increase in internationaltrade and foreign direct investment (FDI) in both developed and developing countries.While a large literature has investigated the adjustment process taking placein the aftermath of trade liberalization, there is much less systematic evidence onhow countries adjust after receiving large inflows of FDI.The purpose of this chapter is to summarize the existing empirical evidence onhow indigenous producers are affected by the presence of foreign investors andhow they respond to new opportunities and challenges created by FDI inflows.As the existing knowledge on this subject is still limited, the note points topotentially fruitful areas for future research.The note starts with a brief review of the arguments for why indigenousproducers should be affected by FDI. There is a consensus in the literature thatmultinational corporations (MNCs) are characterized by large endowments ofintangible assets which translate into superior performance. This implies that MNCspresent formidable competition for indigenous producers in any host country, whileat the same time being a potential source of knowledge spillovers (Section 2). Tosubstantiate this view, the note presents empirical evidence from Indonesia indicatingthat new foreign entrants taking the form of greenfield projects exhibithigher productivity than domestic entrants or mature domestic producers. Further,the note reviews evidence on foreign acquisitions of Indonesian plants which suggeststhat such acquisitions lead to large and rapid productivity improvements takingplace through deep restructuring of the acquisition targets (Section 3).Next, the note discusses findings of enterprise surveys and econometric firmlevelstudies which suggest that FDI inflows increase competitive pressures intheir industry of operation (Section 4) and lead to knowledge spillovers withinand across industries (Section 5). In Section 6, the implications of inflows of FDIinto service sectors are reviewed. In particular, it is argued that the presence offoreign service providers may increase the quality, range, and availability of serv-