Export, FDI and firm productivity

Abstract

Many empirical papers tested the theoretical predictions of Helpman, Melitz and Yeaple (HMY, 2004) which sorts firms at different internationalization states according to their productivity levels. While these papers ignore the fact, that the theoretical predictions of HMY only apply to firms that become engaged in market-driven Foreign Direct Investment (FDI), we apply a more precise methodology using a French firm sample with more than 110 000 observations. Our results show that firms with a broader investment strategy, reflecting a great importance of market-driven motives, show higher productivity levels than firms with less encompassing foreign investment strategies. We conclude that the methodology is well-suited to sort firms according to the importance of market-driven FDI.

Keywords:

• foreign direct investment
• multinational enterprises
• productivity

JEL Classification::

• F10
• F23
• D21
• D24

Acknowledgements

Special thanks are expressed to Christoph M. Schmidt for research guidance and support. We would also like to thank Joel Stiebale for helpful comments and suggestions. Financial support by the RGS Econ is gratefully acknowledged.

Notes

¹ The NACE (Nomenclature générate des Activités dans les Communautes Européenes) classification is the statistical industrial code for economic activities in the EU.

² Alfaro and Charlton (2009) were the first in applying this approach to analyse the FDI pattern between high-wage countries in more detail.

³ Each AMADEUS update allows to observe the internationalization status of companies for the year in which the update was released. Unfortunately, the status in 2003 is not known as no AMADEUS update from this year is available to the authors.

⁴ Abbreviations for the D, DX and DI group follow closely the cited literature.

⁵ He used information from the Irish Economy Expenditure Survey to focus on the level of international outsourcing at the firm level, defined as the ratio of imported materials over total wages, and the ratio of imported service inputs over total wages. The higher the ratio the larger will be the incentive for resource-driven FDI.

⁶ His model predicts that the most productive firms choose horizontal FDI, followed by export-supporting FDI and classic exporting.

⁷ A different industry code for the mother company and the subsidiary usually implies that the subsidiary is active in an upstream or downstream industry (within the production and value chain) with respect to the industry of the mother company.

⁸A more detailed typology based on the NACE 4-digit level may reduce the problem of misclassification (see Alfaro and Charlton, 2009 for empirical findings). Overall, taking the NACE 4-digit level instead of the NACE 2-digit level results in very similar findings.