Seminar 25 September 2014

Title: Foreign Ownership, Selection, and Productivity

Abstract:

Using a unique firm level panel data set from several advanced countries, we show that both financial foreign investors (e.g., private equity, banks, and hedge funds) and industrial foreign investors select high productivity manufacturing firms. Foreign firms endogenously select firms based on their expected future productivity growth, which likely depends on many features of the target firms beyond those observable from the balance sheets. We construct a measure of exogenous changes in FDI which allows us to investigate the causal effect of foreign direct investment (FDI) on the productivity of target firms. Our measure is motivated by the similarity of financial and industrial investors in their selection of target firms. We find that exogenous changes in FDI lead to increased productivity although the effect is relatively small (compared to some previous estimates) and realized with a lag of several years.