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Former Foreign Affiliates: Cast Out and Outperformed?

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  • Beata Smarzynska Javorcik
  • Steven Poelhekke

Abstract

The literature has documented a positive effect of foreign ownership on firm performance. But is this effect due to a one-time knowledge transfer or does it rely on continuous injections of knowledge? To shed light on this question we focus on divestments, that is, foreign affiliates that are sold to local owners. To establish a causal effect of the ownership change we combine a difference-in-differences approach with propensity score matching. We use plant-level panel data from the Indonesian Census of Manufacturing covering the period 1990-2009. We consider 157 cases of divestment, where a large set of plant characteristics is available two years before and three years after the ownership change and for which observationally similar control plants exist. The results indicate that divestment is associated with a drop in total factor productivity accompanied by a decline in output, markups as well as export and import intensity. The findings are consistent with the benefits of foreign ownership being driven by continuous supply of headquarter services from the foreign parent.

Suggested Citation

  • Beata Smarzynska Javorcik & Steven Poelhekke, 2014. "Former Foreign Affiliates: Cast Out and Outperformed?," CESifo Working Paper Series 5111, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5111
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    Cited by:

    1. Fabrice Defever & Alejandro Riano, 2017. "Twin peaks," Discussion Papers 2017-15, University of Nottingham, GEP.
    2. repec:eee:inecon:v:112:y:2018:i:c:p:70-87 is not listed on IDEAS
    3. Gidehag, Anton & Lodefalk, Magnus, 2016. "Recruiting for Small Business Growth: Micro-level Evidence," Working Papers 2016:6, Örebro University, School of Business.
    4. Arlan Brucal, Inessa Love, Beata Javorcik, 2018. "Energy savings through foreign acquisitions? Evidence from Indonesian manufacturing plants," GRI Working Papers 289, Grantham Research Institute on Climate Change and the Environment.
    5. repec:eee:indorg:v:63:y:2019:i:c:p:283-325 is not listed on IDEAS
    6. ITO Yukiko, 2015. "Are There Trade-offs between the Existing and New Foreign Activities?," Discussion papers 15101, Research Institute of Economy, Trade and Industry (RIETI).
    7. Brucal, Arlan & Javorcik, Beata & Love, Inessa, 2019. "Good for the environment, good for business: foreign acquisitions and energy intensity," LSE Research Online Documents on Economics 101090, London School of Economics and Political Science, LSE Library.
    8. Haucap, Justus & Rasch, Alexander & Stiebale, Joel, 2019. "How mergers affect innovation: Theory and evidence," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 283-325.
    9. Paul Pelz & Steven Poelhekke, 2018. "Good mine, bad mine: Natural resource heterogeneity and Dutch disease in Indonesia," OxCarre Working Papers 214, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    10. Fabrice Defever & Alejandro Riaño, 2017. "Twin Peaks," CESifo Working Paper Series 6729, CESifo Group Munich.
    11. Bruno Merlevede & Victoria Purice, 2019. "Border Regimes And Indirect Productivity Effects From Foreign Direct Investment," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 19/965, Ghent University, Faculty of Economics and Business Administration.
    12. Christa N. Brunnschweiler & Steven Poelhekke, 2019. "Pushing One's Luck: Petroleum ownership and discoveries," University of East Anglia School of Economics Working Paper Series 2019-01, School of Economics, University of East Anglia, Norwich, UK..
    13. repec:eee:indorg:v:63:y:2019:i:c:p:583-614 is not listed on IDEAS
    14. repec:pal:jintbs:v:50:y:2019:i:6:d:10.1057_s41267-019-00248-2 is not listed on IDEAS
    15. García-Vega, María & Hofmann, Patricia & Kneller, Richard, 2019. "Multinationals and the globalization of R&D," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 583-614.

    More about this item

    Keywords

    divestment; foreign direct investment; Indonesia and productivity;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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