FOREIGN OWNERSHIP AND PRODUCTIVITY DYNAMICS

Abstract

In analyzing the distinctive contribution of foreign subsidiaries and domestic firms to productivity growth in aggregate Belgian manufacturing, this paper shows that foreign ownership is an important source of firm heterogeneity affecting productivity dynamics. Foreign firms have contributed disproportionately large to aggregate productivity growth, but more importantly reallocation processes differ significantly between the groups of foreign subsidiaries and domestic firms.

In recent years a large number of studies have demonstrated the importance of firm heterogeneity for productivity growth, in contrast to earlier growth accounting that traditionally started from the presumption of an aggregate production function based on the representative firm (Bartelsman and doms (2000)). Theoretical models of firm dynamics have formalized the concept of firm heterogeneity and discussed the effects of learning, innovation, investment, entry and exit on firms’ productivity level and evolution (Jovanovic (1982), Pakes and Ericson (1987), Hopenhayn (1992)). Accordingly, recent empirical work has decomposed aggregate productivity into the effects of intra-firm productivity changes, market share allocations among firms with different levels of productivity, and changes in the population of firms. A common finding of this line of research is that large-scale ongoing reallocation of outputs and inputs across individual firms including the entry and exit of firms, contributes to a large extent to productivity growth in industries and countries. Additionally, it is found that this reallocation reflects merely within rather than between industry reallocation (Baily et al (1992), Bartelsman and Drymes (1994), Griliches and Regev (1995), Olley and Pakes (1996), Haltiwanger (1997), Foster et al (1998), Levihnson and Petrin (1999)).

Alternative decompositions have been used in order to assess the contributions of different categories of firms to aggregate productivity growth (Baldwin (1995), Baily et al (1996)), surprisingly however the distinctive contribution of foreign firms and domestic firms have not yet been analyzed. Productivity dynamics within the group of foreign firms and domestic firms can expect to be different given that foreign subsidiaries in host countries are typically found to be more productive than domestic firms (Dunning (1993), Caves (1996)), and that firm dynamics especially entry and exit are reported to differ considerably between foreign and domestic firms (Siegfried and Evans (1994), Geroski (1995)). This paper introduces foreign ownership as an additional source of firm heterogeneity in the analysis of productivity growth and illustrates its importance with reference to a small open country that has attracted large inflows of foreign direct investment.

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