Foreign ownership, sales to multinationals and firm efficiency: the case of Brazil, Morocco, Pakistan, South Africa and Vietnam

Abstract

Using a one-step stochastic frontier model for five developing countries, this article shows that foreign firms benefit from a better investment climate, which significantly explains why they are more efficient than local firms. This article uses the share of each firm's sales to multinationals located in the country to assess the importance of vertical spillovers, while controlling for the direct impact of the investment climate on efficiency. The results show that firms, particularly small local firms, selling more of their production to multinationals are more efficient, highlighting the presence of vertical spillovers through backward linkages.

Keywords:

• foreign ownership
• firm efficiency
• vertical spillovers
• investment climate
• developing countries

JEL Classification:

• D24
• F23
• O50
• O14

Acknowledgements

The author thanks Andrew Berg, Jean-Louis Combes, Jaime de Melo, Gérard Duchêne, Rachid Laajaj, Abdoul Mijiyawa, Patrick Plane and Elisabeth Sadoulet for comments.

The views expressed in this article are those of the author and do not represent those of the International Monetary Fund (IMF) or IMF policy.

Notes

¹ The years in parentheses indicate the year during which the survey was conducted in each country.