Multinational Companies and Productivity Spillovers: Is There a Specification Error?

12 Pages Posted: 6 Mar 2002

Date Written: February 2002

Abstract

Recent empirical works on the within-sector impact of inward investments on domestic firms' productivity have found rather robust evidence of no (or even negative) effects. This paper argues that a specification error might characterise those studies. In fact, measuring foreign presence as the share of foreign to total sectoral activity (e.g. foreign employment share) in a sector, existing literature implicitly assumes that changes in the same proportion of both foreign and aggregate activities within a sector have no effect on the productivity of local firms. It is shown that this is a restrictive assumption which is very likely to cause a downward bias on the estimate of the inward FDI externality, thus increasing the probability of finding negative or non-significant effects. We propose a more general specification, which includes the commonly adopted measure of foreign presence as a special case. Using data on Italian manufacturing firms, we find positive externalities only once we allow for the more flexible specification.

Keywords: Multinational firms, Productivity spillovers, Omitted variable bias

JEL Classification: C23, F23, O19

Suggested Citation

Castellani, Davide and Zanfei, Antonello, Multinational Companies and Productivity Spillovers: Is There a Specification Error? (February 2002). Available at SSRN: https://ssrn.com/abstract=303392 or http://dx.doi.org/10.2139/ssrn.303392

Davide Castellani (Contact Author)

Henley Business School ( email )

Whiteknights
Reading, Berkshire RG6 6UD
United Kingdom

Antonello Zanfei

Universita di Urbino ( email )

Via Saffi 2
Urbino, Pesaro-Urbino 61029
Italy

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