Entry of Foreign Multinational Firms and Productivity Growth of Domestic Firms: The case of Japanese firms

This paper examines whether and how the entry of foreign multinational firms affects productivity growth of domestically owned firms, using Japanese firm-level data for the period 2000-2007. Although there are a considerable number of studies conducting productivity analyses on foreign multinationals and domestic firms for the manufacturing sector, there are few such studies for the service sector. Against this background, the present paper focuses on the role of foreign entry in the service sector, where cross-border trade is often difficult and firms are therefore less likely to be exposed to international competition. The results of the analysis suggest that foreign multinationals perform better than domestically owned firms in many sectors. However, although the productivity levels of the former tend to be higher than those of the latter, no significant difference in productivity growth rates is found. Moreover, once firm-fixed effects are controlled for, foreign presence in a particular industry tends to negatively affect the productivity growth rate of domestically owned firms in the industry. However, firms that are catching up with the productivity frontier enjoy positive FDI spillovers, implying that foreign entry accelerates productivity catch-up.