Foreign Ownership and Productivity: is the Direction of Causality so Obvious?

Luigi Benfratello and Alessandro Sembenelli

No 166, Development Working Papers from Centro Studi Luca d'Agliano, University of Milano

Keywords: multinational firms; total factor productivity; panel data (search for similar items in EconPapers)
JEL-codes: C23 D24 F23 (search for similar items in EconPapers)
Date: 2002-11-01
Note: The purpose of this paper is to estimate the e¤ect of foreign ownership on productivity under reasonable identification assumptions. In particular we estimate dynamic Cobb-Douglas production functions augmented with a set of variables capturing complementary characteristics of foreign ownership. We apply the GMM- System estimator developed by Blundell and Bond (1998) to a large sample of firms located in Italy. Our aggregate findings suggest that after controlling for unobserved heterogeneity, simultaneity and measurement errors, foreign ownership has no effect on productivity. Therefore we do not find widespread empirical support to the standard internalization theory of foreign direct investment. However, we also find that nationality matters since firms under US ownership tend to be more productive than firms under national ownership. In turn this additional result suggests that the transfer of knowledge implied by the internalization theory occurs only if the difference between the recipient and the investment country is suffciently pronounced.
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Related works:
Journal Article: Foreign ownership and productivity: Is the direction of causality so obvious? (2006)
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