Does Foreign Ownership Improve Firm's Productivity? An Analytical View.

AuthorSingh, Rajesh Kumar


Expert thinkers encourage inward FDI, considered as a key source of driver of economic growth especially in the emerging economies where capital and technology are scarce compounded with lack of skilled, productive manpower and efficient processes. The economic growth of a country depends on its ability to harness the natural advantages through efficient utilization of productive resources, technology, capital and labor. Foreign capital in the form of FDI could lead to change in the firm's ownership either to minority or the majority in the host country.

The trend of inward FDI across countries is increased in recent years due to trade globalization and economic reforms in the emerging economies. The prime motivation for the host countries to attract FDI was based upon the basic premise that its presence would benefit them by the exposure to upgraded technology, availability of funds and better processes to improve productivity. Interestingly World Bank stated in 1993 that "FDI brings considerable benefits: technology transfer, management know-how, and export marketing accesses". While in late 1960s and early 1970s, inward foreign direct investment (FDI) was frequently alleged to be disadvantageous for host countries the opinion in recent years has changed drastically (Sahu & Solarin, 2013). In many cases host countries have expressed concern that FDI entry through the takeover of domestic firms is less beneficial though not completely harmful for economic development. The rationale of these concerns was that overseas acquisitions did not promote the productive capacity but rather transfer ownership and shift the control from domestic to foreign hands. The primary reasons to make these changes in the structure of firm were usually an important factor to achieve benefits. However they were frequently opposed by the host country labor unions. On the other end, the FDI route where foreign firms invested in the firms of the host countries was well researched and good amount of evidences were available to form opinions. In recent days a new topic which was drawing the attention of the scholars was to study the FDI impact on the family vs. non-family firms.

This paper reviews the literature associated with foreign ownership through FDI and its impact on productivity in the light of these views.

Yes: Foreign Ownership Accelerates Productivity in Host Country

Multinational firms always look for opportunity to leverage their capital and technical capability to strengthen their market share in the host countries. This led to flow of capital and technology from the matured multinational firms to target firms in the host countries and the subsequent changes in the firm's ownership in host countries. Inward FDI had always fascinated firms as it opens up the gates to access advanced foreign technology and capital resources.

Caves (1974) was one of the early scholars who demonstrated the positive correlation between inward FDI and productivity. Globerman (1979) also supported the findings and argued that if foreign firms brought new products or innovation in the host country then host country firms benefit through the accelerated dissemination of technology. In one of the early papers, Demsetz (1983) found that technology gap between foreign and host countries led to FDI, and also established positive correlation between structure of the ownership and firm's productivity. Lall and Mohammad (1983) were able to establish positive link between FDI and productivity in the host country firms. Blomstrom and Wolff (1989) observed that the inflow of FDI can reduce the technological gap among foreign and domestic firms of developing country and could establish that this led to quicker convergence between Mexican and American industries. Agrawal (1990) found during their study of the corporate capital structure and agency cost, that all-equity firms exhibit greater levels of managerial controls and stockholdings. They could establish that foreign ownership in the capital structure could lead to higher productivity in the host firm.

Theories prompting technological spi llovers observed that host country firms may get benefited from the presence of FDI in the same industry, leading to horizontal spillovers or intra-industry, through labor movement and positive competition. Kholdy (1995) was able to establish the causality between foreign investment and spillover efficiency caused due to FDI in the host country. McGuckin (1995) established that change in the ownership of the plants was positively correlated with the productivity improvement of the plants. In the study of the globalization of technology-product cycle model, Cantwell (1995) was able to establish that despite technology dispersion, leaders have been ahead. FDI however helped to improve the productivity and technical edge in the host country but it did not harm the technology leading country as well. Helpman (1999) was able to link that foreign ownership in the firms improved the level of productivity and reduced the cost of innovation which helped to improve total factor productivity. Djankov (2000) predicted positive impact on total factor productivity growth of recipient firms in Czech Republic. In one of the studies in the context of Belgian industries, De Backer (2003) found that foreign firms contributed disproportionately to the productivity growth of the host country firm. Deva (2004) stated that despite facing empirical difficulties to measure the technology spillovers, improvements in productivity among the FDI infused firms were visible. In the context of UK industries, Haskel (2007) estimated that with the increase of 10% foreign ownership through FDI, total factor of productivity increases by 0.5% in the host country firms. This study was showing significant light on the positive co-relationship between foreign ownership and firm's total factor productivity. Nilekani (2009) in the context of India also observed a similar trend with a separate view on the firm's ownership. In the context of Asian developing countries where FDI was considered one of the core vehicles for development, Liang (2017) found positive productivity spillovers between foreign suppliers and their domestic customers. They also observed that local firms learn from both joint ventures and wholly-owned foreign subsidiaries.

In recent years, where FDI flow in India was growing, Chopra (2012) observed that introduction of FDI and change in the ownership structure could help the country in job creation, infrastructure development, and the country's GDP growth. Sahu and Solarin (2013) demonstrated the spillover action by incorporating FDI in measuring productivity of the manufacturing sector. The result indicated that the increase in foreign equity at firm and sector levels directly affected the productivity growth of the firm. Anwar (2014) observed that the size of the spillovers depended on firm age, capital intensity and ownership structure. While studying the impact of the foreign direct investment in the host countries, Singh (2017) carried out an excellent study to evaluate the relationship between FDI and productivity. He narrated that in most of...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT