Academic journal article National Institute Economic Review

The Domestic Performance of UK Multinational Firms

Academic journal article National Institute Economic Review

The Domestic Performance of UK Multinational Firms

Article excerpt

This paper analyses the domestic performance of UK multinational firms from two perspectives: (i) their productivity relative to foreign multinationals, domestic exporters and non-exporters, and (ii) their ability to benefit newly acquired affiliates. Nonparametric analysis shows that the productivity distribution of UK multinationals is dominated by their foreign counterparts (especially US firms), and quantile regressions reveal that the performance disadvantage of UK multinationals is more pronounced at the higher end of the productivity distribution. Using a difference-in- differences methodology, it is found that, unlike foreign acquisitions, take-overs of domestic non-exporting firms by UK multinationals do not appear to lead to any productivity improvements.

I. Introduction

Between 1996 and 2000, UK multinational corporations had spent 42.6 billion [pounds sterling] in foreign direct investment, and by the end of this period they owned a staggering 600 billion [pounds sterling] worth of assets abroad. (1) Yet, in contrast to the literature that documents the link between foreign multinationals in the UK and economic performance, (2) research on the domestic efficiency advantages or disadvantages of those multinationals has been very limited. Using data on quoted companies, Kumar (1984) finds that UK multinationals earn higher returns on assets and on sales than their purely domestic counterparts. Grant (1987) and Grant et al. (1988) report a positive association between overseas investment and firm-level financial performance in a sample of large UK manufacturing enterprises. Recently Criscuolo and Martin (2002) provide cross-sectional evidence that the average labour productivity of UK multinationals is higher than domestically oriented firms, and not any worse than non-US multinationals operating in the UK. But Han and Lee (1998) contend that multinationality in UK and other G-7 countries' firms does not generally translate into superior performance compared with otherwise similar enterprises.

This paper undertakes an empirical investigation into the performance of manufacturing affiliates owned by UK multinationals relative to foreign and purely domestically-owned firms, based on firm-level panel data over the period 1989-98. In so doing, it adds to the existing literature in three respects. First, instead of focusing on average productivity differentials, it evaluates the effects of multinationality on the entire productivity distribution. This is achieved through the use of two statistical approaches: the Kolmogorov-Smirnov nonparametric testing procedure and the semiparametric method of quantile regression. The Kolmogorov-Smirnov tests employ the concept of stochastic dominance to rank the cumulative distribution functions of total factor productivity, whilst quantile regressions trace the entire distribution of productivity, conditional on a set of regressors. This enables one to identify not just the average effects of multinationality, but also where in the productivity distribution these effects are more pronounced.

The second novelty introduced in this paper is the explicit comparison of the productivity dynamics of UK multinationals with domestic exporters. While there are a number of papers documenting that exporters are more productive than non-exporters, (3) none of them distinguishes between domestic multinationals and simple exporters. Some scholars have argued in the literature that profit stability (and hence efficiency) from foreign direct investment exceeds that from simple exporting since multinationals diversify in both product and factor markets, whereas exporters diversify in product markets alone (e.g., see Rugman, 1974). We subject this notion to empirical investigation, as it may have some implications for policies that seek to encourage domestic firms to optimally engage in foreign market activities.

The paper also explores the relative performance of domestic multinationals vis-a-vis their foreign counterparts from a different perspective; it asks whether UK and foreign multinationals are equally effective in transferring their firm-specific advantages (e. …

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