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Indirect productivity effects from foreign direct investment and multinational firm heterogeneity

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Abstract

This paper analyzes for a panel of Romanian manufacturing firms whether the quality of foreign firms, measured by their productivity level, affects their potential as a source of indirect productivity effects on domestic firms. We find that only sufficiently productive foreign firms generate positive productivity effects on domestic supplier firms. The most productive foreign firms are the main source of productivity effects. Domestic firms with higher productivity levels also enjoy larger total positive productivity effects. When supplying foreign firms that are less productive than themselves, domestic firms experience zero to negative effects.

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Notes

  1. Our dataset of Romanian firms is taken from the Amadeus database and has been used in several papers in the literature and is known for its extensive coverage and high quality reporting of basic firm-level information (cf. infra).

  2. Furthermore, Damijan et al. (2013) indicate that foreign affiliates in Eastern Europe (we consider Romania) are mainly engaged in end-user consumer goods.

  3. We follow Amiti and Konings (2007) and compute investment from our data as the change in real capital corrected for a depreciation rate taken from the Penn World Table.

  4. Downstream foreign entry could increase demand for intermediate products which may result in scale economies. To separate this effect, the regression includes demand for intermediates following Javorcik (2004) calculated as:

    $$\begin{aligned} demand_{jt} = \sum \limits _{k} a_{jk} * Y_{kt} \end{aligned}$$

    where \(\alpha _{jk}\) is the IO-matrix coefficient which indicates that in order to produce one unit of good k, \(\alpha _{jk}\) units of good j are needed. \(Y_{kt}\) is the output of industry k deflated by an industry-specific deflator.

  5. We use multiple issues (published on DVDs) of the database because a single issue is only a snapshot of the ownership information and firms that exit are dropped from the next issue released. In order to get a full overview of ownership and financials through time, multiple issues are required. See Merlevede et al. (2014).

  6. If the ‘outlier’ is due to the first or last observation for a specific firm and other data points are normal, the other firm-year data are kept. If this is not the case, all observations for the firm are dropped from the data.

  7. The larger the spread of the distribution of foreign and domestic firms and the smaller the gap between both, the larger the variation across firms in values for the foreign presence variables within an industry.

  8. Averaged over domestic firms within an industry, in 2005 up to 51% (22%) of foreign firms within the industry are foreign firms with a productivity level more than two standard deviations higher (lower) than the focal domestic firm. The average across industries is 10% (5%). Between 1 and 37% (1 and 32%) of foreign firms have a productivity level between one and two standard deviations higher (lower). The average across industries is 19% (12%). Foreign firms with a productivity level up to one standard deviation higher account for between 10 and 41% of foreign firms within an industry (30% averaged over industries), those with a productivity level up to one standard deviation lower account for between 5 and 39% of foreign firms within the industry (24% averaged).

  9. Figures showing only the contribution of statistically significant backward effects are very similar.

  10. This would be observationally equivalent to a situation where foreign firms with higher productivity levels identify industries with more potential for ‘actively and successfully assisting and developing local suppliers’ at low cost. If high quality foreign firms are able to predict productivity evolutions in supplier industries, it is also highly likely that they will be able to discern such possibilities as well.

  11. Geishecker et al. (2009) confirm empirically that firms with affiliates abroad are more productive than those without affiliates.

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Acknowledgements

The authors acknowledge financial support of the Research Foundation - Flanders (FWO-Vlaanderen).

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Authors and Affiliations

  1. Department of Economics, Ghent University, Tweekerkenstraat 2, 9000, Ghent, Belgium

    Karolien Lenaerts & Bruno Merlevede

  2. Research Foundation-Flanders (FWO-Vlaanderen), Brussels, Belgium

    Karolien Lenaerts

  3. CEPS, Brussels, Belgium

    Karolien Lenaerts

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  1. Karolien Lenaerts
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  2. Bruno Merlevede
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Correspondence to Bruno Merlevede.

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Lenaerts, K., Merlevede, B. Indirect productivity effects from foreign direct investment and multinational firm heterogeneity. Rev World Econ 154, 377–400 (2018). https://doi.org/10.1007/s10290-017-0298-9

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  • DOI: https://doi.org/10.1007/s10290-017-0298-9

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