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Countries such as Australia which are broadly open to foreign direct investment (FDI) by multinational enterprises (MNE) can benefit from ‘spillover’ effects from FDI that boost the productivity of domestic firms. For example, domestic suppliers to MNE subsidiaries can benefit from having to meet higher standards, and locals who work in MNE subsidiaries can take the skills and knowledge they gain to other businesses in the economy.

To what extent does FDI create spillovers that boost the productivity of domestic businesses?

Adept Economics Director Gene Tunny caught up with the authors of a recent study published in July 2020 in the Journal of International Business Studies which examines Foreign Influence, control, and indirect ownership: Implications for productivity spillovers . Gene spoke with authors Sara McGaughey, soon to take up a position as Professor at Copenhagen Business School, and Professor Pascalis Raimondos, Head of the School of Economics and Finance at QUT Business School. Sara and Pascalis have taken advantage of the huge Orbis business database which has allowed them to construct a panel dataset of nearly 576,000 manufacturing firms across 20 European countries. They find evidence that controlled foreign firms can boost the productivity of other firms in the same industry (horizontal spillovers), while previous studies had only convincingly found evidence of vertical spillovers, between foreign affiliates and their domestic suppliers.

The study shows the importance of taking into account both direct and indirect ownership links to the ultimate foreign owner when categorising a firm as ‘foreign’ in a host economy, with implications for managers, policy makers and scholars of international business. The diagram below illustrates the ownership of the data used. The majority of the the firms included in the study were purely domestic, meaning they were not MNEs nor were they subject to foreign influence or control. FDI10 refers to a dummy variable equal to 1 if the observation is at least 10% owned by a direct single foreign investor. FDI50 refers to a dummy variable equal to 1 if the observation is at least 50% ultimate foreign owned. Nearly 3% of results came from FDI50 firms, which are at least 50% owned or controlled by a foreign entity, while approximately 1.5% of firms were FDI10 and had an immediate foreign direct investor which held at least a 10% ownership stake in the company.

To listen to the full conversation, and to check out the show notes, head to the link below:
Foreign Direct Investment and Productivity  

Illustration of ownership data used