Multinational companies and productivity spillovers: is there a specification error?

Abstract

Recent empirical works on the within-sector impact of inward investments on domestic firms’ productivity have found rather robust evidence of no (or even negative) effects. We suggest that, among other reasons, a specification error might explain some of these results. A more general specification, which includes the usual one as a special case, is proposed. Using data on Italian manufacturing firms in 1992–2000, we find positive externalities only once we allow for the more flexible specification.

Acknowledgements

The authors are grateful to Roberto Simonetti and Ciro Rapacciuolo for supplying part of the data utilized in this work, and to Elisabetta Andreani, Elvio Ciccardini and Claudio Cozza for research assistantship. We also wish to thank Nigel Driffield, Grazia Ietto-Gillies, Jack Lucchetti and Lucia Piscitello, for helpful discussions. Usual disclaimers apply. Financial support from the EU (Project on The Structure of Innovation and Economic Performance Indicators (SIEPI) and MIUR (Prot. n. 2001133591_001) are gratefully acknowledged.

Notes

¹ In particular, the focus on intra-sectoral rather than on inter-sectoral spillovers (Driffield et al ., 2002; Smarzynska-Javorcik, 2004) and the disentangling of scale effects from technological externalities (Girma and Görg, 2007)

² For analytical simplicity we chose a Cobb–Douglas specification for the production function. However, as it will be shown shortly, the empirical implementation we use can be derived from a logaritmic differentiation of a generic production function (among others see Caballero and Lyons,1991; Basu and Fernald, 1995).

³ See Castellani and Zanfei (2003) for a more detailed discussion of the nature and determinants of productivity spillovers in the case of Italy, as opposed to France and Spain.

⁴ Studies reviewed by Görg and Greenaway (2004) and Görg and Strobl (2001) differ in the type of data used (sector vs. firm-level, panel vs. cross-section), in the vector of control variables and in the proxies used for aggregate and sectoral activity (employment, capital, output). However, there seems to be a general agreement on the use F/T ratio as a measure of externality.

⁵ As we noted above, such a simple specification is used for illustrative purposes and is required to keep tractable the analytical derivation of the bias below (Greene,1997 p. 402).

⁶ We thank Jack Lucchetti for an illuminating discussion on this point.

⁷ Real values of Y, K and M are obtained by deflating respectively nominal turnover, book value of fixed assets net of depreciation and costs of materials.

⁸ A similar approach is taken by Aitken and Harrison (1999 p. 610, footnote 7) and Ruane and Ugur (2002). The former article reports that spillovers from foreign investments do not change significantly using this specification (negative spillovers to Venezuelan plants are confirmed). However, coefficients estimated with this alternative specification are not reported, thus it is not possible to assess whether the foreign externality eventually increases in magnitude as predicted by our model. The latter article reports that in a sample of Irish manufacturing firms the coefficient on the foreign presence ratio is nonsignificantly different from zero, while positive externalities FDI externalities occur if foreign and domestic sectoral employment are entered as separate regressors.