Country and firm confounding effects - how to fix it

[oksanakim]

Hello All

I would appreciate your advice on the following. I am estimating a model using a panel data: 40 firms across 49 months, total of 1,960 firm-month observations. In my sample, firms represent several countries and in some cases, there is only 1 company from a given country. I did not control for country-fixed effects previously. Now, someone looked at my results and suggested that because some countries have only 1 firm (49 firm-month observations), then the company and country effects would be confounded. Do I correctly understand that this means that it will be hard to determine whether a company or company-related effects have impact on the dependent variable? How would I fix the issue? Would controlling for country-fixed effects (by introducing a set of dummy variables) overcome this issue? Thanks a lot!!