Impact of foreign ownership on firm productivity: evidence from Japanese manufacturing firms

Abstract

This article presents the methodology to examine the impact of foreign ownership on firm productivity using firm-level data of Japanese manufacturing firms from 2000 to 2016, which include 1,458 listed companies in Japan. Firm productivity is represented by total factor productivity (TFP), which is estimated by the Olley–Pakes semiparametric estimation method to minimize the simultaneity problem in production function estimation. In the estimation of the impact of foreign ownership on firm productivity, system GMM estimation is applied to address a possible reversal causality problem between foreign ownership and firm productivity. Based on the case of the manufacturing firms in Japan, this article shows that 1 percentage point increase in foreign ownership increases the firm productivity by 0.06 percent. The evidence of this article supports the positive impact of foreign ownership on firm productivity and further implies that the promotion of foreign investment could be a policy option to improve firm productivity.

Highlights

• This study analyzes the impact of foreign ownership on firm productivity.

• Firm-level data of the Japanese manufacturing firms from 2000 to 2016 are analyzed.

• The result supports the positive impact of foreign ownership on firm productivity.

Keywords:

• Firm productivity
• total factor productivity
• foreign ownership
• foreign investment

JEL CODES:

• D24
• O16

Acknowledgments

I would like to express my gratitude to Professor BAAK Saang Joon, Professor KONDO Yasushi, Professor SHIMIZU Kazumi, and Professor KONISHI Hideki of Waseda University, and Professor HORI Keiichi of Kwansei Gakuin University for their invaluable comments and advice. I also would like to thank Alexander Schwartz of University of Chicago for research assistance.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The Olley–Pakes method has an option for firm exit. However, this option is not used in this study because the data set does not have specific information regarding whether the firm exits because of liquidation or for other reasons, such as acquisition by another firm.

2 Labor is a firm’s number of employees.

3 The value of the HHI may range from close to 0 to 10,000.

4 The real effective exchange rate provided by the International Monetary Fund is used.