Foreign direct investment productivity premium and foreign affiliates' heterogeneity: A comparison between advanced and emerging market overseas investments in the EU

Abstract

This paper aims to investigate the existence of productivity heterogeneity among foreign‐owned firms (FOFs) based in the European Union (EU). Using firm‐level data for a sample of FOFs investing in the EU over the period 2006–14, we find that foreign affiliates from advanced countries (AFOFs) show a positive productivity gap compared to foreign affiliates from emerging countries (EFOFs). However, when we consider the type and the motivation of foreign direct investment, our results reveal that, while AFOFs always seem to be more productive than EFOFs in manufacturing sectors, EFOFs appear to enjoy a productivity premium compared to AFOFs in the services, when their activity occurs in the same industry as their parent and they operate in less knowledge‐intensive market sectors.

The effects of cross‐border acquisitions on firms' productivity in the EU

“…It also groups the largest share of acquisitions in our sample, accounting for 49 per cent of all deals. Previous literature has identified the knowledge‐intensive versus less‐knowledge‐intensive distinction as a factor likely to be relevant in terms of potential negative or positive effects of an acquisition on firm‐level productivity (Pittiglio & Reganati, 2019; Salis, 2008). This distinction is also highly relevant for services activities, which groups the second largest share of acquisitions in our data (19 per cent).…”

“…The effect of cross‐border acquisitions on the TFP of target firms is negative and statistically significant when acquisitions take place both in high and medium‐high and in medium‐low and low‐technology manufacturing, as presented in specifications (1) and (2) in Table 4. Previous empirical research on cross‐border acquisitions and productivity has pointed out at the possibility that in sectors characterised by technologically advanced activities, the degree of technological transfer from the target to the acquiring firms is more likely to be larger, with consequent productivity deterioration in the target firm (Pittiglio & Reganati, 2019; Salis, 2008). The productivity reductions identified for target firms in the medium‐low and low‐technology manufacturing post‐acquisition could be due several factors pointed out in previous literature.…”

“…In these cases, the theoretical mechanisms that suggest productivity improvements through technology or managerial transfers are less clear (Buckley et al, 2014;Chari et al, 2012;Pittiglio & Reganati, 2019). These types of acquiring firms are more likely to absorb, rather than transfer, technical and marketing knowledge from target firms located in developed countries (Carril-Caccia, 2020;Pittiglio & Reganati, 2019). Buckley et al (2014) find evidence that acquisitions performed by firms originating in emerging countries are likely to have differing effects on productivity of the acquired company depending on the resources, experience and other characteristics of the acquiring firms.…”

“…This is also the case with acquisitions where the acquiring firm originates in an emerging economy. In these cases, the theoretical mechanisms that suggest productivity improvements through technology or managerial transfers are less clear (Buckley et al., 2014; Chari et al., 2012; Pittiglio & Reganati, 2019). These types of acquiring firms are more likely to absorb, rather than transfer, technical and marketing knowledge from target firms located in developed countries (Carril‐Caccia, 2020; Pittiglio & Reganati, 2019).…”

“…Some papers have recently explored productivity differentials between emerging market foreign firms operating in the EU, when compared to developed markets foreign firms, in several sectors. Pittiglio and Reganati (2019) highlight the importance of accounting for the type of FDI and the motivations behind it, as these aspects are likely to affect the performance of foreign-owned firms in the EU. Sanfilippo (2015) finds evidence of productivity gaps between emerging and advanced economies foreign-owned firms and concludes that European affiliates owned by parent companies located in foreign emerging economies were less productive.…”