FOREIGN COMPETITION, FIRM HETEROGENEITY AND THE DISTINCTION BETWEEN TFP AND EMPLOYMENT FIRM GROWTH

This paper compares the role of foreign competition in firms’ extensive and intensive growth based on population data for manufacturing firms registered in Slovenia in the 1994–2003 period. Extensive firm growth is measured in terms of employment, while intensive firm growth is defined in terms of total factor productivity (TFP). Based on system GMM estimates, we find significant differences between the determinants of intensive and extensive firm growth and across different parts of the TFP distribution: (i) local firms with the exception of firms from the upper tail of the TFP distribution experience a competition effect of increased imports both in terms of their reduced employment and TFP growth; (ii) inward FDI measured by foreign firms’ share in industry employment has a significantly positive effect on TFP firm growth for firms from the 25-100 centile of the TFP distribution, while this factor decreases the employment growth of firms from the lower and medium quartiles of the distribution. The likelihood that the positive productivity spillover effect outweighs the negative competition effect associated with inward FDI thus increases with a firm’s TFP. Given the greater scope of efficiency externalities and stronger reallocation effects where foreign firms enter via FDI compared to the trade entry mode, policy actions aiming to attract inward FDI are expected to have a larger positive impact on the aggregate productivity level and a more encouraging/less discouraging impact on employment relative to already established benefits associated with removing barriers to imports. Our results also suggest that, while trade policy measures would have a relatively uniform impact on employment growth regardless of a firm’s relative TFP performance, TFP growth would adjust significantly differently across the TFP distribution. In addition, despite the empirically confirmed relevance of considering firm heterogeneity, competition pressure from foreign firm operations seems to carry more weight for firm growth compared to firms’ ability to learn through their exporting activity or from their eventual foreign owner right across the TFP distribution.