How Domestic and Foreign Firms Differ and Why Does it Matter?

Abstract.  This paper reviews and summarises the results of selected studies on performance gaps between multinational enterprises and their domestic counterparts. Performance gaps arise in such fields as productivity, technology, profitability, wages, skills and growth. While these gaps are often attributed to foreign ownership of the affiliates, the theory of the Multinational Enterprise argues that these gaps are due to being a Multinational rather than the nationality of the firm. Empirical evidence on the existence of performance gaps between foreign and domestic firms is supportive of this view: foreign ownership turns out to be a much less important explanatory factor than normally assumed. Firm‐specific assets and firm characteristics like industry, size, parent country and multinationality per se are more important. Such results are broadly consistent with those derived in the literatures on ownership change, on foreign entry and on spillovers. We conclude that there is little case for foreign direct investment promotion policies to discriminate between firms on the basis of ownership.     

Foreign direct investment and productivity spillovers in the Chinese manufacturing sector

In this paper a simple simultaneous model is constructed to examine whether there are productivity spillovers from both the presence of foreign direct investment (FDI) and competition between local and foreign firms. The model is tested on the data from China’s latest industrial census in 1995. The results indicate that the extent to which spillovers occur varies with different types of ownership of local firms and of FDI. While collective- and private-owned enterprises benefit from demonstration and contagion effects from foreign presence, productivity gains of state-owned enterprises largely come from competition with foreign firms. Productivities of local and foreign firms are jointly determined. Evidence also suggests that market-oriented FDI tends to generate spillovers mainly via competition with local firms.     

Strategic R&D Location by Multinational Firms: Spillovers, Technology Sourcing, and Competition

This paper develops a model of strategic interaction in R&D internationalization decisions between two multinational firms, competing both abroad and in their home markets. It examines different incentives for foreign R&D faced by a technology leader and a technology laggard. The model takes into account the impact of local inter firm R&D spillovers, (noncostless) international intra firm transfer of knowledge, and the notion that internal R&D increases the effectiveness of incoming spillovers. Analytical results suggest that greater efficiency of intra firm transfers and greater R&D spillovers increase the attractiveness of domestic R&D for the technology leader if the technology gap with the laggard is large. The lagging firm, in contrast, increases the share of foreign R&D as foreign technology sourcing becomes more effective. Competition encourages the leading firm to engage in foreign R&D to capture a larger share of profits on the foreign market, whereas the laggard concentrates more R&D at home to defend its home market position.     

FOREIGN DIRECT INVESTMENT AND REGIONAL PRODUCTIVITY SPILLOVERS IN US MANUFACTURING

This research examines how inward foreign direct investment (FDI) impacts manufacturing productivity in select industries across US regions. Although some evidence has documented the phenomenon of knowledge spillovers to national economies, little is known about how the regional penetration of foreign investment affects the productivity performance of local firms. The analysis proceeds in a novel fashion by adjusting aggregate data on industry operating statistics to "net out" the contaminating influence of foreign firms producing in each of the host regional economies. A cross section of state-by-industry observations is used to estimate labor productivity, controlling for FDI penetration both by region and by industry. In general, the results demonstrate that domestic firms do not reap productivity gains as a result of a larger presence of foreign affiliates. Related research efforts, although not specifically concerned with the regional transmission of FDI spillovers, offer corroborative support for these findings.     

Multinational Corporations and Spillovers

This paper examines spillover effects of the activities of multinational firms. Such effects are most likely to be found in host countries, where the operations of foreign multinationals may influence local firms in the MNCs own industry as well as firms in other industries. However, there is no comprehensive evidence on the exact nature or magnitude of these effects, although it is suggested that host country spillovers vary systematically between countries and industries. In particular, the positive effects of foreign investment are likely to increase with the level of local capability and competition. The spillovers to the home countries of MNCs are often more difficult to identify, for various reasons. Earlier studies suggest that the effects are generally positive, but the increasing international division of labor within multinationals complicates the analysis. The impact on the home country is likely to depend on what activities these firms concentrate at home.     

R&D in a strategic delegation game

This paper studies how a separation of ownership and management affects firms' R&D and production decisions in Cournot quantity competition. It is found that when R&D spillovers are small, owners strategically direct their managers away from profit maximization towards sales. Consequently, managerial firms invest more in R&D and have higher output and lower prices compared to their entrepreneurial counterparts. On the other hand, when spillovers are large, owners ‘penalize’ managers for sales. In this case, managerial firms have lower R&D, lower output and higher prices. Nonetheless, managerial firms have lower profits than their entrepreneurial counterparts regardless of spillovers. This paper also examines the welfare effects of a separation of ownership and management. It is found that in terms of first-best social welfare, managerial firms are more (less) efficient than their entrepreneurial counterparts with low (high) spillovers. However, in terms of second-best social welfare, managerial firms are less efficient with all spillovers. © 1997 John Wiley & Sons, Ltd.     

Firm performance and knowledge spillovers from academic, industrial and foreign linkages: the case of China

Firm performance may be enhanced by linkages with academic institutions, other firms, and foreign markets that confer knowledge spillovers as well as internal R&D that creates firm-specific knowledge. In particular, firm productivity and innovation may be enhanced by positive externalities from knowledge and technology produced by universities and research institutions (URIs) and diffused to the domestic economy. Productive contributions from such linkages might be particularly expected in China, where policy measures have explicitly supported and facilitated connections between URIs and firms to stimulate economic development and competitiveness. In this paper, we measure the performance impact of such knowledge spillovers in Chinese firms by using a variety of specifications, estimators, and robustness checks, including an ??instrumental variable?? specification that controls for endogeneity. We find more patent activity in Chinese firms with URI connections and enhanced firm productivity particularly from linkages with research institutions (RIs). Introduction of new products, processes, and new businesses is also positively associated with linkages with research institutions, as well as with linkages with other firms.     

Ownership,firm size and rent sharing in Bulgaria

Using a unique three-digit firm-level data set of all medium and large manufacturing enterprises in Bulgaria covering the years 1997–1998, we investigate how wages are affected by ownership status, firm size and rent sharing. Our pooled OLS, panel and first-difference TSLS estimates clearly point to ownership structure as an important determinant of both the wage level (for given productivity) and the degree of rent sharing. Rent sharing is very pronounced in state-owned firms but far less pronounced in private domestic and foreign firms. The results strongly confirm the existence of a multinational wage premium. In addition, we find weak evidence of a positive firm size-wage effect and a positive effect of firm size on the degree of rent sharing. If these effects exist, they are often more pronounced in private domestic firms.     

Foreign Equity Ownership and Information Asymmetry: Evidence from Japan

Using a large sample of Japanese firms, we investigate whether the level of foreign ownership in a firm is inversely related to information asymmetry between firm (managers) and market (outside investors). Since information asymmetry is not directly observable and, thus, is difficult to measure empirically, our analysis focuses on the link between foreign shareholding and a measurable consequence of information asymmetry; that is, the timing and magnitude of intertemporal return‐earnings associations. The empirical results support our hypothesis, and subsequent tests based on residual foreign ownership show that the relation between foreign ownership and information asymmetry is robust to the addition of various control variables such as market capitalization and cross‐corporate holdings. We also show that foreign investors tend to avoid stocks with high cross‐corporate holdings. Overall, our results suggest that foreign (institutional) investors are likely to be efficient processors of public information and are attracted to Japanese firms with low information asymmetry.     

R&D,Interindustry and International Technology Spillovers and the Total Factor Productivity Growth of Manufacturing Industries in Canada, 1974-1989

The paper presents new econometric evidence on the relationship between total factor productivity growth and the R&D expenditures of Canadian manufacturing industries in the presence of interindustry and international spillovers of technology. In contrast to studies that presume that international spillovers are incorporated in imports of intermediate and/or capital equipment goods, the present paper assumes that the principal channel of transmission of new technology is foreign direct investment. Three original proxies for international spillovers use information on patenting, the size and the origin of foreign ownership in the host country and the R&D expenditures in the country of origin. The results suggest that the nexus between industry's own R&D expenditures and the TFP growth is significant and positive, especially for the process-related R&D. Domestic interindustry spillovers of new technology have a larger effect on TFP than industry's own R&D expenditures. All three proxies for international technology spillovers are associated positively and significantly with TFP growth. However, international spillovers contribute to TFP growth less than domestic interindustry spillovers and less than own process-related R&D.     

The impact of knowledge spillovers and innovation on firm-performance: findings from the Balkans countries

This paper investigates factors affecting firm performance. Using data from Business Environment and Enterprise Performance Surveys (BEEPS 2013–2014), findings indicate that the following have a positive effect on firm performance: (i) innovative activities; (ii) knowledge spillovers; (iii) foreign ownership; and (iv) the proportion of skilled workers in the workforce. The paper therefore argues that innovation activities are endogenously related to firm performance, and that the performance of firms is influenced by knowledge spillovers and innovation activities, among other firm characteristics. The paper contributes to the literature by identifying spillovers and innovation activities as causal variables of firm performance—a novel approach to investigating knowledge spillovers and innovation activities.     

国内投入、中间进口与FDI垂直溢出——基于非竞争型投入产出表的实证研究

本文通过将FDI垂直溢出进行分解,并考虑投入产出效率的动态变化,检验了中国FDI溢出效应。结果表明:不存在线性水平溢出,但不排除非线性的可能性;不存在倒U形的技术溢出特征,外企通过购买国内投入而产生的后向溢出是最重要的技术溢出渠道,且对产出的影响成非线性,而外企通过购买中间进口而产生的后向溢出则可能存在门槛效应;外企通过提供中间进口而产生的前向溢出是否存在并不确定,由线性溢出回归可知外企通过提供国内投入而产生的前向溢出为负。     

Regional Foreign Direct Investment and Wage Spillovers: Plant Level Evidence from the UK Electronics Industry*

This paper examines the extent to which foreign investment in the UK generates wage spillovers in the domestic sector of the economy using a simultaneous dynamic panel data model and focusing on the electronics sector, possibly the most ‘globalized’ sector of UK manufacturing. It finds evidence that the higher wages paid by foreign firms cause wages in the domestic sector to be bid up. This phenomenon is, however, largely confined to the region where foreign direct investment takes place.     

Firm efficiency: Domestic owners,coalitions, and FDI

In this paper we analyze the evolution of firm efficiency in the Czech Republic. Using a large panel of more than 190,000 Czech firm/years we study whether firms fully utilize their resources, how firm efficiency evolves over time, and how firm efficiency is determined by ownership structure. We employ a panel version of a stochastic production frontier model for the period 1996–2007 with time-varying efficiency. We differentiate among various degrees of ownership concentration and domestic or foreign origin. In a two-stage set-up we first estimate the degree of firm inefficiency and then the effect of ownership structure on the distance from the efficiency frontier. Our results support the hypothesis that concentrated ownership is positively related to efficiency. FDI has beneficial effects at the microeconomic level. However, we show that a simple majority is not necessarily the best structure to improve efficiency. We further analyze the effects of ownership coalitions and shed light on many other subtleties of how ownership and the specific industry affect firm efficiency.     

A survey of enterprise reforms in China: The way forward

The strategic importance of the state-owned enterprise (SOE) sector to the Chinese economy cannot be underestimated, thus the success of SOE reform is a significant factor in China's future economic prosperity. The dilemma facing state authorities is to develop market-orientated corporations while at the same time coping with potentially high unemployment and a range of equity and social justice issues. This paper presents an analysis of the current issues in SOE reform in China, drawing on relevant empirical evidence, and proposes a strategic direction and a framework for reform that challenges the recently announced program of privatization of listed SOEs. The literature indicates that state ownership is generally negatively correlated to performance. Conversely, Legal Person ownership positively influences performance. Other forms of private ownership are generally positively correlated to performance, with institutional ownership showing significant promise. Consequently, the divesture of state ownership is recommended and could be accomplished over three or four tranches. The state could divest its ownership by auction to strategic investors, both domestic and foreign, and in the next tranche an auction to the broad populace through units in mutual funds. The final proposed tranche being a distribution to nationwide pension funds to support retirement schemes, which should be made nationwide. Finally, listed firms should also issue shares as rights issues to offer present shareholders protection from dilution.     

Shareholder Heterogeneity and Conflicting Goals: Strategic Investments in the Japanese Electronics Industry

This article investigates the effects of the changing institutional environment on strategic orientations of Japanese electronics firms during the 1990s. We examine the effects of three different types of shareholders on strategic directions of their invested firms. The first one, foreign portfolio investors, characterizes the emerging influence that pressed for change in corporate strategies. The two domestic shareholders, corporate investors and financial institutions, represent the conventional forces for continuity. Between the two domestic forces, though, while corporate investors attempted to maintain status quo, financial institutions have shifted towards market‐oriented behaviour of investment. Specifically, we explore: (1) the influence of each type of shareholder on a firm's diversification strategy and capital commitment; and (2) the moderating effects of firm performance on the relationships between ownership structure and strategic choices. The results suggest that foreign investors prefer the focused product portfolio and conservative capital commitment. They also prefer the reduction of capital investment when the financial performance of their invested firms is poor. Domestic financial institutions are now similarly sensitive to the performance of their invested firms when those firms make strategic investments. By contrast, domestic corporate shareholders remain indifferent to performance, while they aim to maintain relational business ties with invested firms.     

Dynamic and non-neutral productivity effects of foreign ownership: A nonparametric approach

This paper studies two novel productivity characteristics of foreign acquisition on high-tech manufacturing firms: the dynamic and the non-Hicks-neutral effects. A dynamic productivity effect of foreign ownership arises when adoption of foreign technology and management practices takes time to fully realize. Furthermore, these dynamic adjustments may be capital or labor augmenting as adoption of advanced production technologies tends to have non-neutral productivity implications in developed countries. We propose and implement an econometric framework to estimate both effects using firm-level data from China's manufacturing sector. Our framework extends a nonparametric productivity framework, in which identification is achieved using a firm's first-order conditions and timing assumptions. We find strong evidence of dynamic and non-neutral effects from foreign ownership, with significant differences across investment sources. Investment from OECD sources is found to provide a long-term productivity boost for all but the largest recipients, while that from Hong Kong, Macau, and Taiwan does not raise performance. These findings have implications for China's declining labor share and for the rising domestic value-added content of its high-tech exports.     

Ownership structure and firm performance in emerging markets: A comparative meta-analysis of East European EU member states,Russia and China

Using a total of 4425 estimates collected from 204 previous studies, this paper presents a meta-analysis performed to compare East European EU member states, Russia and China in terms of the relationship between ownership structure and firm performance. The results indicate that, as the standard theory predicts, state ownership negatively influences the performance of firms the state invests in, while the presence of domestic outside investors and foreign investors as company owners positively affects firm performance irrespective of the difference in country/region. Furthermore, we also found that ownership of managers tends to exert a positive impact on the performance of their owned firms. Overall, however, the linkage between corporate ownership and performance is weak. This finding implies that, in comparison with advanced economies, management discipline by investors is less sufficient in emerging markets.     

Foreign Direct Investment and Managerial Knowledge Spillovers through the Diffusion of Management Practices

Although managerial knowledge spillovers have long been claimed to be a major benefit of foreign direct investment (FDI), such spillovers have not yet been systematically analysed. This paper adds to the literature by analysing the nature and extent of managerial knowledge spillovers from FDI through the diffusion of management practices. Taking into account the tacit and explicit elements of management practices and distinguishing between industry and non‐industry specific practices, the paper identifies different types of spillovers and discusses their transmission mechanisms. Evidence from establishment‐level panel data from the UK attests to the existence and significance of intra‐industry, linkage, and non‐linkage based inter‐industry spillovers of managerial knowledge from foreign to local firms, although the strength varies for different types of practices. The spillovers are geographically localized, especially in channels without supply chain linkages. Local firms are selective in the adoption of individual practices and the spillover effects are more significant at the cluster and management system level. Reverse spillovers from local firms to MNEs from industrialized countries appear to be limited despite significant spillovers of practices amongst local firms.     

Stable R&D Cooperation with Spillovers

The literature on the incentives for R & D cooperation with spillovers typically deals only with the factors affecting cooperative profits. This paper focuses on the incentives to cheat and the stability of such cooperative agreements in a repeated game framework. It is shown that the stability of cooperation is influenced by the nature and magnitude of spillovers, relative to the nature and degree of product market competition. While cooperative profits are higher with large positive (exogenous, unintended) know-how spillovers, such as in fundamental research, our anslysis shows that it may be easier to sustain cooperation in areas with lower spillovers, such as applied research, because of the smaller incenfives to cheat on the initial agreement, at least when firms produce substitutes. Alternatively, the possibility of technology sharing (i.e., intended or endogenous spillovers), besides R&D coordination, not only increases cooperative profits but also reduces the incentives to defect from a cooperative equilibrium.