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The effect of investor origin on firm performance: Domestic and foreign direct investment in the United States

Listed author(s):
  • Chen, Wenjie

This paper evaluates the causal relationship between the source of origin of FDI and the performance of the target firm. The empirical analysis uses new data on a comprehensive sample of public U.S. firms that received FDI between 1979 and 2006. To account for the possibility that performance differences arise due to the selection of superior target firm rather than the change in ownership, I use propensity score matching to create similar comparison groups of target firms prior to acquisitions. The analysis reveals three major findings. First, acquiring firms from industrialized countries lead to labor productivity increases of 13% in the target firm three years after the acquisition compared to targets acquired by domestic firms. Firms that received developing country firm acquisitions, on the other hand, exhibit lower labor productivity gains four years after acquisition, compared to targets acquired by domestic firms. Second, targets receiving FDI by firms from industrial and developing countries also experience increases in profits, compared with firms receiving acquisition by domestic firms from the United States. Third, compared with domestic acquisitions, foreign industrial firm acquisition FDI tends to increase their targets' employment and sales, whereas targets acquired by firms located in developing countries experience a decrease in both revenues and total number of employees. These findings suggest that target firms are subject to significantly different restructuring processes depending on the origin of the acquiring firm.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 83 (2011)
Issue (Month): 2 (March)
Pages: 219-228

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Handle: RePEc:eee:inecon:v:83:y:2011:i:2:p:219-228
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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