Foreign Ownership and Productivity: Is the Direction of Causality so Obvious?

Centro Studi Luca d'Agliano Development Studies Working Paper No. 166

32 Pages Posted: 22 Jan 2003

See all articles by Luigi Benfratello

Luigi Benfratello

University of Turin - Department of Economics and Financial Sciences G. Prato; CERIS-CNR

Alessandro Sembenelli

University of Turin - Department of Economics and Financial Sciences G. Prato

Date Written: November 2002

Abstract

The purpose of this paper is to estimate the effect of foreign ownership on productivity under reasonable identification assumptions. In particular we estimate dynamic Cobb-Douglas production functions augmented with a set of variables capturing complementary characteristics of foreign ownership. We apply the GMM-System estimator developed by Blundell and Bond (1998) to a large sample of firms located in Italy. Our aggregate findings suggest that, after controlling for unobserved heterogeneity, simultaneity and measurement errors, foreign ownership has no effect on productivity. Therefore we do not find widespread empirical support to the standard internalization theory of foreign direct investment. However, we also find that nationality matters since firms under US ownership tend to be more productive than firms under national ownership. In turn, this additional result suggests that the transfer of knowledge implied by the internalization theory occurs only if the difference between the recipient and the investment country is sufficiently pronounced.

Keywords: multinational firms, total factor productivity, panel data

JEL Classification: C23, D24, F23

Suggested Citation

Benfratello, Luigi and Sembenelli, Alessandro, Foreign Ownership and Productivity: Is the Direction of Causality so Obvious? (November 2002). Centro Studi Luca d'Agliano Development Studies Working Paper No. 166, Available at SSRN: https://ssrn.com/abstract=347901 or http://dx.doi.org/10.2139/ssrn.347901

Luigi Benfratello

University of Turin - Department of Economics and Financial Sciences G. Prato ( email )

C. so Unione Sovietica, 218 Bis
Torino, 13820-4020
Italy
+39 011 6706072 (Phone)
+39 011 6706062 (Fax)

CERIS-CNR ( email )

Italy

Alessandro Sembenelli (Contact Author)

University of Turin - Department of Economics and Financial Sciences G. Prato ( email )

C. so Unione Sovietica, 218 Bis
Torino, 13820-4020
Italy
+39 011 670 6059 (Phone)
+39 011 670 6062 (Fax)

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