CHAPTER 2: LITERATURE REVIEW
2.3 Empirical Evidence
2.3.2 Firm Productivity
According to Greenaway, Guariglia and Yu (2014), when the share of foreign ownership in firms increases, foreign owners tend to be more productive, thus increasing the total profit of firms.
Contrarily, since the increase in foreign ownership translates to a decrease in the total profits that will be dispersed to domestic owners, their incentives to contribute to production decreases, leading to a lower level of total productivity, which in turn reduces total profit. The overall effect depends on the level of foreign ownership. Hence, the impact of foreign ownership on firm productivity can be interpreted as another avenue for firm performance as productivity and profitability are closely related and should produce similar trends (Foster, Haltiwanger and Syverson, 2008). Firm productivity is analysed in the succeeding literature where the principal focus is on whether the relationship between foreign ownership and firm productivity is either positive or negative. Therefore, unlike the preceding empirical evidence, less emphasis is given to the shape of the relationship (i.e., linear versus non-linear). In addition, in contrast to the literature on firm performance, studies centred on productivity have focused on developed and developing countries.
31 Globerman, Ries and Vertinsky (1994) tested for differences in productivity and wages between Canadian-owned, US-owned, Japanese-owned, and European-owned firms in Canada. This study used industry dummy variables to capture the influence of the industry. The results showed that labour productivity was substantially higher for foreign-owned firms, but that this difference disappeared once size and capital intensity were controlled for. Furthermore, it was found that foreign-owned companies tended to pay higher wages to production workers. These findings suggested that FDI improved productivity and income levels in Canada.
Griffith (1999) used data collected from the Annual Census of Production to determine whether foreign-owned firms in the UK car industry were more productive than domestic-owned firms over the period 1980 to 1992. The production functions were estimated using panel data analysis, with the results demonstrating that German and US subsidiaries had a significant Total Factor Productivity (TFP) advantage over domestic UK firms.
In another study of the UK, Harris and Robinson (2002) aimed to determine whether foreign- owned plants from the US, European Union (EU) and South East (SE) Asia exhibited superior productivity compared to domestic plants for all manufacturing firms, from 1974 until 1995. The system GMM approach was used to estimate the models and. Similar to the findings of Griffith (1999), in general, US-owned firms outperformed the UK-owned firms. There was little evidence of a significant productivity differential between UK-owned plants and EU-owned plants. For SE Asian-owned firms, the results were mixed as they performed better in some industries but worse in others.
Fons-Rosen, Kalemli-Ozcan, Sørensen, Villegas-Sanchez and Volosovych (2015) used a unique firm-level panel data set from advanced European countries (Belgium, Germany, Spain, Finland, France, Italy, Norway, Portugal and Sweden) over the period 1999 until 2008, to investigate the effect of foreign ownership on firm-level productivity. Fons-Rosen et al. (2015) confirmed that foreign ownership was endogenous as it was a function of current and expected future productivity and firm-level variables. This implied that foreign investors endogenously selected high productivity firms. Hence, this study utilised the instrumental variables (IV) approach to control for endogeneity. Results revealed that firms that received FDI displayed small increases in TFP;
however, these increases in productivity only materialised after several years.
32 Driffield, Sun and Temouri (2018) used Hansen's (2000) threshold estimation technique to examine the relationship between foreign ownership and productivity across four countries (UK, Germany, Italy and Poland) from period 2001 to 2010. With the use of a split sample, Hansen's (2000) threshold estimation method enabled the authors to investigate the possibility of a non- linear relationship between firm productivity and foreign ownership by endogenously identifying and estimating the value of foreign ownership at which the impact of foreign ownership either switched in signs or magnitude. In Germany, foreign firms were found to have a higher productivity than local firms. This coincides with a previous study by Temouri, Driffield and Higón (2008) who also discovered that foreign firms were more productive than all local firms in Germany. As a matter of fact, Driffield et al. (2018) found that German MNCs had the highest level of TFP, followed by the UK, Italy and Poland across the entire distribution for the manufacturing sector. With regard to the services sector, Italian MNCs were the second most productive after German MNCs, followed by the UK and Polish MNCs. Hansen's (2000) threshold method yielded an increasing but non-linear relationship between foreign ownership and productivity.
Turning to evidence from developing countries, Takii (2004) conducted a study to investigate whether foreign affiliates used more advanced technology or skills compared to domestic companies in the Indonesian manufacturing sector in 1995. The results suggested that foreign companies were more productive than domestic companies and, in addition, companies with 100%
of foreign ownership were more productive than companies with less foreign ownership. This finding differs from a previous Indonesian study by Blomström and Sjoholm (1999), who claimed that the productivity of foreign-owned plants did not depend on the level of foreign ownership.
Using the GMM estimation technique to account for endogeneity, Li, Lu and Ng (2009) compared the productivity of foreign firms and domestic firms in China. The empirical analysis used data from the Survey of Chinese Enterprises. The results found that a 10% increase in foreign ownership led to an approximately 10% increase in labour productivity. However, the identity of the foreign ownership mattered, as only foreign ownership from foreign firms had a positive impact on productivity but not ownership from foreign banks, institutional investors or individuals. Li et al.
(2009) suggested that the productivity improvement from foreign ownership might have arisen from the transfer of technology, managerial skills and products and the bridging with overseas markets, as per the resource-based theory in section 2.2.1.2.
33 Greenaway et al. (2014) used both accounting (such as return on sales (ROS) and ROA) and productivity measures (such as labour productivity and TFP) in their study of the relationship between foreign ownership and firm performance in China. Their sample comprised of 21 582 unlisted Chinese firms over the period 2000 to 2005. Given possible endogeneity of the regressors, this study used the first difference GMM approach to estimate all specifications and found that an inverse U-shape characterised the foreign ownership-performance relationship among Chinese firms. Specifically, the turning points were found to be 52.31%, 64.24%, 55.65%, and 46.79% of foreign ownership for ROA, ROS, labour productivity and TFP, respectively. This indicates that a substantial level of domestic ownership is still essential to guarantee optimal firm performance.
A positive effect of foreign ownership on productivity is confirmed by most studies. Unlike the firm financial performance in developed countries, foreign ownership increased firm productivity in developed countries (such as Canada, UK and Germany).