Estimating Direct and Indirect Effects of Foreign Direct Investment on Firm Productivity in the Presence of Interactions between Firms

42 Pages Posted: 4 Oct 2014

See all articles by Sourafel Girma

Sourafel Girma

Nottingham University Business School

Yundan Gong

Nottingham University Business School

Holger Görg

University of Kiel; Kiel Institute for the World Economy

Sandra Lancheros

University of Nottingham

Abstract

We implement a method to estimate the direct effects of foreign-ownership on foreign firms' productivity and the indirect effects (or spillovers) from the presence of foreign-owned firms on other foreign and domestic firms' productivity in a unifying framework, taking interactions between firms into account. To do so, we relax a fundamental assumption made in empirical studies examining a direct causal effect of foreign ownership on firm productivity, namely that of no interactions between firms. Based on our approach, we are able to combine direct and indirect effects of foreign ownership and calculate the total effect of foreign firms on local productivity. Our results show that all these effects vary with the level of foreign presence within a cluster, an important finding for the academic literature and policy debate on the benefits of attracting foreign owned firms.

Keywords: propensity score matching, SUTVA, foreign direct investment, interactions

JEL Classification: F23

Suggested Citation

Girma, Sourafel and Gong, Yundan and Gorg, Holger and Lancheros, Sandra, Estimating Direct and Indirect Effects of Foreign Direct Investment on Firm Productivity in the Presence of Interactions between Firms. IZA Discussion Paper No. 8509. Available at SSRN: https://ssrn.com/abstract=2505371

Sourafel Girma (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Nottingham, NG8 1BB
United Kingdom
+44 0 115 8466656 (Phone)

HOME PAGE: http://www.nottingham.ac.uk/~lizsmg/

Yundan Gong

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham NG8 1BB
United Kingdom

Holger Gorg

University of Kiel ( email )

Olshausenstr. 40
D-24118 Kiel, Schleswig-Holstein 24118
Germany

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

Sandra Lancheros

University of Nottingham ( email )

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