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Outward Foreign Direct Investment and Domestic Performance: the Italian Manufacturing and Services Sectors

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Abstract

How does outward foreign direct investment (FDI) affect employment and productivity growth in the home country? Does the impact of outward investment differ among manufacturing and service sectors? In this paper we analyze the effects of investing abroad using firm-level data for Italy for the period 2003–2006. We adopt matching techniques in combination with a difference-in-difference estimator in order to investigate the causal effect of becoming multinational on domestic employment and productivity. Preliminary results suggest that Italian outward FDI has limited effects on domestic employment and performance of internationalizing firms on average. However, results significantly differ depending on the sector (manufacturing versus services) where the MNEs are operating. In particular, we find that while in the manufacturing sector, outward FDI tends to strengthen both productivity and, to less extent, employment. In the service sector, we find a negative effect on employment (two years after the investment).

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Notes

  1. Note that the firms that had invested abroad prior to year t are excluded from our sample, so as to focus exclusively on the impact of becoming multinational.

  2. Matching involves pairing treatment and comparison units that are similar in terms of their observable characteristics. When the relevant differences between any two units are captured in the observable (pretreatment) covariates, which occurs when outcomes are independent of assignment to treatment conditional on pretreatment covariates, matching methods can yield an unbiased estimate of the treatment impact.

  3. This type of matching procedure is preferable to randomly or indiscriminately choosing the comparison group, because it is less likely to induce estimation bias by picking firms with markedly different characteristics.

  4. The conditional independence assumption (CIA) is a strong assumption once it is realized that firms base their investment decisions on future expected profits, which are unobserved by the econometrician.

  5. In identifying MNEs, we consider a participation rate benchmark of 10%, so we consider parent an Italian firm holding a direct ownership share of at least 10% in one or more firms located in a country other than Italy.

  6. TFP is a measure of total factor productivity and is calculated as the residual from a Cobb-Douglas production function, which is estimated separately for each Ateco 3-digit industry. In order to deal with the potential simultaneity problem in estimating firm level production functions, we employ the method proposed by Levinsohn and Petrin (2003) using intermediate inputs as instrument.

  7. Following Sianesi (2002) and Caliendo and Kopening (2005), the exogenous variables are lagged by 1 year, Xi,t−1 (at time t −1).

  8. To check matched data, we run also a probit regression only on the pairs of matched data and find, as we expected, that the R-squared drops significantly and none of the variables are any longer significant

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Authors and Affiliations

  1. Istituto Economia e Finanza, University of Rome, La Sapienza, Rome, Italy

    Cesare Imbriani

  2. Second University of Naples, Capua, Italy

    Rosanna Pittiglio

  3. Sociologia e Comunicazione, University of Rome, La Sapienza, Rome, Italy

    Filippo Reganati

Authors
  1. Cesare Imbriani
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  2. Rosanna Pittiglio
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  3. Filippo Reganati
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Correspondence to Rosanna Pittiglio.

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Imbriani, C., Pittiglio, R. & Reganati, F. Outward Foreign Direct Investment and Domestic Performance: the Italian Manufacturing and Services Sectors. Atl Econ J 39, 369–381 (2011). https://doi.org/10.1007/s11293-011-9285-z

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