This paper examines the impact of foreign direct investment (FDI) on local firms in the same industry. It develops an analytical framework to assess the effects of FDI, including competition in product and factor markets, and linkage effects to supplier industries. The authors find that FDI can lead to the establishment of local industrial sectors, which may grow to the point where they outcompete and displace FDI plants. The results are consistent with experiences in several industrial sectors in newly industrializing countries (NICs). The paper also explores the endogenous entry decision of multinational firms and the coexistence of multinational and local firms. It concludes by discussing the implications for welfare and policy appraisal of FDI projects, suggesting that a broader scope is needed in standard project appraisal techniques to address linkages between related activities and cumulative causation.This paper examines the impact of foreign direct investment (FDI) on local firms in the same industry. It develops an analytical framework to assess the effects of FDI, including competition in product and factor markets, and linkage effects to supplier industries. The authors find that FDI can lead to the establishment of local industrial sectors, which may grow to the point where they outcompete and displace FDI plants. The results are consistent with experiences in several industrial sectors in newly industrializing countries (NICs). The paper also explores the endogenous entry decision of multinational firms and the coexistence of multinational and local firms. It concludes by discussing the implications for welfare and policy appraisal of FDI projects, suggesting that a broader scope is needed in standard project appraisal techniques to address linkages between related activities and cumulative causation.