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

Sourafel Girma, Yundan Gong, Holger Görg and Sandra Lancheros

When considering the impact of inward foreign direct investment on host country productivity, researchers and policy makers generally think about two aspects. The first is the direct effect of foreign ownership, boiling down to the question as to whether affiliates of foreign multinationals in a host country are more productive than comparable domestic firms. The second aspect is spillovers, i.e., whether there is any effect from the presence of foreign firms on the productivity of domestic or other foreign-owned firms. These two questions have been pursued in, for the most part, two separate literatures. Examining direct effects and spillovers in isolation leads to potentially biased estimates and policy conclusions, however. In this paper, we bring the two strands of literature together and offer a unified framework to estimate direct and indirect causal effects from foreign ownership on firm level productivity which allows for interaction between foreign and domestic, and foreign and foreign firms.

In this Nottingham School of Economics working paper, in the Journal of International Economics, Sourafel Girma and co-authors find that the direct effect of foreign-ownership is positive and increases strongly with the overall level of foreign-owned firms in a cluster. On the other hand, they document consistently negative spillovers from foreign presence on domestic firms. Also, in contrast to much of the literature on spillovers, the approach shows that the strength of these negative spillovers is not constant but differs significantly with the level of foreign ownership in a cluster. In terms of spillovers from the presence of foreign firms on other foreign firms, the authors also find a negative effect up to a level of 30 percent foreign-owned firms in a cluster. This has important implications for arguments favouring the agglomeration of foreign-owned firms in a cluster, as this shows that the benefits from such agglomerations might only become positive once a certain threshold is reached.

Journal of International Economics, “Estimating direct and indirect effects of foreign direct investment on firm productivity in the presence of interactions between firms” by Sourafel Girma, Yundan Gong, Holger Görg and Sandra Lancheros.

http://dx.doi.org/10.1016/j.jinteco.2014.11.007

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