Academic journal article Journal of Business Economics and Management

Does Leverage Affect Labour Productivity? A Comparative Study of Local and Multinational Companies of the Baltic Countries

Academic journal article Journal of Business Economics and Management

Does Leverage Affect Labour Productivity? A Comparative Study of Local and Multinational Companies of the Baltic Countries

Article excerpt

1. Introduction

Achievement of sustainable economic growth is a central goal for economies worldwide. The neoclassical growth theory drawn on the seminal work of Solow (1956) demonstrates that productivity growth is one of the main drivers for long-term GDP growth per capita. This relationship has found strong empirical support (e.g. Hall, Jones 1999; OECD 2003; Schadler et al. 2006; Arratibel et al. 2007). Understanding the determinants of productivity at a micro level as well as the related challenges and opportunities in a broader context are therefore key elements for exploring the paths for economic growth.

While access to credit has, to a large extent, been seen as a prerequisite for economic success (King, Levine 1993), the recent lending booms have rather demonstrated the risks to company viability resulting from excessive debt financing, highlighted by the global crisis of 2008/09. The impact of leverage on productivity and long-term growth hence deserves closer scrutiny.

As a result of the ageing population, many European economies will be increasingly under pressure in the decades to come. Output growth needs to be achieved with limited increase in labour force and improvements in labour productivity are essential for sustaining growth (1).

This paper focuses on company financing and ownership as determinants of labour productivity. Our aim is to study the relationship between leverage and labour productivity comparing the multinational companies (MNCs) and local companies. Although the areas of capital structure and productivity have both been widely researched, the linkage between company financing, ownership structure and labour productivity has received limited attention in previous literature.

The scarce previous empirical research on the impact of leverage on labour productivity is controversial. While one study (Nunes et al. 2007) has found the impact of leverage on labour productivity to be negative, others have identified a positive (Dimelis, Louri 2002) or non-linear relationship (Kale et al. 2007). We seek to add some new evidence to resolve the puzzle.

We also contribute to the literature by showing that the impact of leverage on labour productivity is different for local companies and MNCs. Although some previous research (for example a summary of which is presented in a review paper by Bellak 2004) has sought to identify the sources of productivity gap between local companies and MNCs, the impact of financing has been ignored.

Just like several other transition economies, the Baltic countries have been successful in attracting foreign investments. Empirical evidence shows that foreign direct investments play an important role in the labour productivity growth in the region (Bijsterbosch, Kolasa 2009). It would therefore be interesting to understand the drivers of labour productivity of multinational companies operating in the Baltic countries, and to identify whether these differ significantly from the determinants of labour productivity of local companies.

Empirical evidence indicates that MNCs in the Baltic countries have more flexibility in their financing decisions compared to local companies (Avarmaa et al. 2011). We seek to investigate whether such flexibility leads to any advantages for MNCs in achieving higher labour productivity. We perform a panel data regression analysis on a sample of 3,676 Baltic companies covering the period of 2001 to 2008. According to our knowledge, this is the first empirical research on the relationships between leverage and productivity covering the three Baltic countries.

The article is set up as follows: the next section provides overview of the literature on the relationships between leverage and productivity, as well as on the productivity differences between foreign and local companies, Section 3 presents the regression model and data, Section 4 explains our results, and the last section concludes the paper. …

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