Firms' Technological Trajectories and the Creation of Foreign Subsidiaries

Abstract

Multinational firms are traditionally considered as firms possessing some technological lead and exploiting this proprietary advantage in international markets, but a growing literature has been arguing that multinational firms set up foreign subsidiaries not only as a means to exploit their own technology but also to enrich it. This paper provides some empirical evidence in this line of analysis. The aim of the paper is to assess the effects of the creation of foreign subsidiaries on firms' technological trajectories. The idea is that by setting up subsidiaries in foreign countries multinational firms can achieve some form of reverse technology transfer which can be expected to affect their technological trajectory. The empirical investigation has been carried out using data from 1992 to 1996 on a sample of 2,185 Italian manufacturing firms. Results support the view that the creation of manufacturing subsidiaries have a positive impact on firms' productivity trajectories and, more interestingly, this positive impact is greater when subsidiaries are created in regions where knowledge spillovers are expected to be relatively higher, such as the U.S.

Keywords: Foreign direct investments, total factor productivity, dynamic panel data

JEL Classification: C23, D24, F23