Impact of Multinational Enterprises on Competition, Productivity and Trade Spillovers across European Firms

We analyze the impact of multinational enterprises (MNEs), via their foreign direct investment, on domestic firms in 30 European host economies, from 2001 to 2013. We incorporate international industrial and trade linkages into a standard theoretical framework and test them empirically on a unique dataset compiled from the Amadeus, Eurostat, UNComtrade and BACI data sources, aggregated at industry level. While controlling for horizontal, vertical, and export channels at the upstream and downstream levels, we show that the presence of MNEs significantly affects domestic firms by changing the degree of competition and improving productivity. The impact is not always positive, as domestic firms are often crowded-out, but the negative effect for an average firm is mostly small.