Academic journal article Economic Inquiry

Multinationals' Productivity Advantage: Scale or Technology?

Academic journal article Economic Inquiry

Multinationals' Productivity Advantage: Scale or Technology?

Article excerpt

I. INTRODUCTION

There is now a substantial body of empirical work that documents a robust and positive correlation between foreign ownership and firm or plant productivity growth across a number of countries. The productivity advantage of foreign-owned firms is usually seen as reflecting multinationals' technological advantage vis-a-vis domestic firms. Multinationals are assumed to have a firm-specific asset, such as know-how, technology etc., which may be transferred easily across borders from the parent to subsidiaries abroad, as discussed by Markusen (2002). This allows them to be more productive than domestic firms. However, high productivity growth is not exclusively derived from technical progress, at least in theory where the direct link between technology and productivity is only valid in a neoclassical production framework with perfect competition, long run equilibrium, and constant returns to scale. Specifically, the productivity analysis literature, such as Balk (2001), highlights the role of changes in scale economies for productivity growth. This is consistent with the notion of learning-by-doing effects as described by Lucas (1988). Intuitively, as output expands, workers and firms gain proficiency at producing particular products. Thus, changes in scale efficiency can also provide an explanation for the observed productivity advantage of foreign firms.

One aim of this study was to decompose the productivity advantage of foreign multinationals into two components: the technology and the scale effect. Apart from being of academic interest, this issue is highly policy relevant. Many governments around the world actively promote inward foreign direct investment (FDI) under the assumption that it may lead to an influx of new technology that will ultimately spill over into the domestic economy. Hence, these policies are predicated on technical efficiency in multinationals. If, however, scale efficiency is the dominant component of foreign firms productivity premium in a particular sector, such policies may be misguided. Unfortunately, FDI theory gives little guidance as to the relative importance of technological progress and scale efficiency in the productivity premium due to foreign ownership. The empirical literature also appears to have neglected the issue of decomposing the productivity effects of multinationality. Hence, this study aimed to uncover the sources of productivity growth in a panel of domestic and foreign plants.

The second objective of this study was to contribute to the ongoing debate about the causal relationship between foreign ownership and productivity growth. While a number of studies, as cited above, have established that foreign-owned firms may have higher productivity growth than their domestic counterparts, there remains a fundamental problem in identifying the performance difference that is attributable to multinationality per se. As Tybout (2000), for example, points out, multinationals may be attracted to more technology-intensive industries, which are also more productive and pay higher wages. Hence, there would be an endogeneity problem in the regressions, and the wage differential between foreign and domestic firms would be difficult to interpret. The inclusion of some observable industry and firm characteristics, as well as unobservable time invariant effects, might go some way toward reducing this bias, though the inclusion of all possible relevant control variables is a difficult if not impossible task.

In this study, we tried to overcome this problem by analyzing the effects of an acquisition of a domestic establishment by a foreign multinational enterprise on productivity growth, decomposed into technology and scale effects. Assuming that an acquisition does not change any of the main characteristics of the takeover target (at least in the short run), a possible effect of the foreign acquisition on productivity growth in the domestic target can be attributed to the change in own ership from domestic to foreign. …

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