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

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Development Working Papers.

The purpose of this paper is to estimate the e¤ect 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 suffciently pronounced. Number 166