enterprises acting as producers of intermediates for SOEs. The net effect on firm
dynamics is consequently an interesting empirical issue.
Second, similar arguments apply when considering the dominance of foreign enterprises
(FR) (foreign enterprise share of total sector output). Aitkin and Harrison (1999)
emphasize that preferential treatment of foreign owned firms may distort competition
and force (equally efficient) domestically owned counterparts out.7 However, one
reason why governments grant special treatment is to promote technology transfer, and
new products and/or production processes introduced by foreign firms may indeed spill-
over to domestic firms. Diffusion can also occur through labour turnover, so a high
presence of foreign enterprises in a particular sector may attract domestic firms. In sum,
whether FR is positively or negatively related to sector switching and firm exit depends
on which of the above effects dominate (competition versus technology transfer).8
Third, the sector concentration ratio (CR), measured as the ratio of the accumulated
revenue of the four largest firms to total revenue in the sector, is often referred to as a
proxy for the degree of competition. Siegfried and Evans (1994) document that a high
CR may strengthen collusion efforts among incumbent firms and increase the likelihood
of behaviour to prevent entry and maintain higher expected profits. In parallel,
Audretsch (1991) has shown that a high CR will help the survival rates of new entrants
in the short run. On balance we expect that a high CR reduces firm incentives to move
out of (i.e. exit or switch out of) a given sector.
Fourth, the average sector efficiency score (EFF) (calculated from the individual firm
efficiency levels) is another indicator of sector level competition. However, as
compared to the CR indicator, the underlying mechanism through which EFF influences
firm exit and sector switching decisions is somewhat different. A high EFF serves as a
push factor, increasing the probability of exit and sector switching for under-average
firm performers to sectors with lower average efficiency levels, where they may be
better able to compete.
7 Evidence for Venezuela suggests that once sector specific effects are controlled for, domestic firms
perform worse as foreign dominance in a sector increases (Tybout, 2000).
8 Foreign enterprises may also create a basis for domestically owned firms to produce intermediate inputs
as in the case of SOEs. Therefore, inter-industry spillovers from FDI may occur. Javorcik (2004) finds
evidence of backward linkages for Lithuania while Alfaro and Rodriguez-Clare (2004) find similar
evidence for Venezuela, Brazil and Chile.