Estimating direct and indirect effects of foreign direct investment on firm productivity in the presence of interactions between firms

Abstract

We implement a method to estimate the direct effects of foreign-ownership on foreign firms' productivity and the indirect effects (or spillovers) from the presence of foreign-owned firms on other foreign and domestic firms' productivity in a unifying framework, taking interactions between firms into account. To do so, we relax a fundamental assumption made in empirical studies examining a direct causal effect of foreign ownership on firm productivity, namely that of no interactions between firms. Based on our approach, we are able to combine direct and indirect effects of foreign ownership and calculate the total effect of foreign firms on local productivity. Our results show that all these effects vary with the level of foreign presence within a cluster, an important finding for the academic literature and policy debate on the benefits of attracting foreign owned firms.2

Foreign ownership and the export and import propensities of developing‐country firms

“…The effect of foreign ownership on firm performance has received considerable attention in the literature. But most studies have been concerned with direct effects on firm productivity or indirect effects, that is spillovers, on locally owned firms (see Görg & Greenaway, 2004 for a survey, and especially Girma, Gong, Görg, & Lancheros, 2015 for a recent, state-of-the-art contribution and a discussion of this strand of the literature). Only few papers have looked at the effect of foreign ownership on the trade performance of firms and these have tended to focus on developed countries (see, for instance, Raff & Wagner, 2014 on the effect of foreign ownership on the extensive margins of exports of German manufacturing firms).…”

Foreign-Versus Domestic-Owned firms in the Predicament ‘Cui bono?’

“…Increased productivity of the working force is always a good sign, especially in economies that are subdued to enterprise restructuring by external factors, e.g. rapid change of ownership structure (Harris, 2002;Haskel, Pereira and Slaughter, 2007;Estrin and Uvalic, 2014;Girma et al, 2015).…”

“…There are two main studies on measuring the productivity of domestic firms in relation to foreign ownership, that we find crucial in this study, i.e. first, Guadalupe (Guadalupe, Kuzmina and Thomas, 2012) and second, Girma (Girma et al, 2015). The first study is important in terms of measuring foreign ownership, productivity, sales that are exported; and the second study was useful in reengineering our model in order to measure domestic firms' productivity in relation to their capacity to absorb spillovers from foreign ownership altered structure by the influx.…”

“…The main culprits of such a negative outcome are usually the crowding-out effect (Caves, 2007) or entry-deterrence (Dixit, 1980). Another important issue related to spillovers from foreign owned to domestic owned firms is whether negative or positive effects will happen to be horizontal (intra-) or vertical (inter-) (Javorcik and Spatareanu, 2008; Girma et al, 2015).…”

Industry FDI and the Distribution of Plant Productivity: Analysis Using Korean Plant‐Level Data

“…Foreign entry increases competition for market share and forces domestic firms to reduce output and raise their average costs. Comprehensive research by Girma et al (2015) considers both direct and indirect (spillover) effects of FDI and shows that while the direct effect of FDI is positive, there is negative spillover from foreign presence to domestic firms.…”