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Estimating Direct and Indirect Effects of Foreign Direct Investment on Firm Productivity in the Presence of Interactions between Firms

Author

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  • Girma, Sourafel

    (University of Nottingham)

  • Gong, Yundan

    (Aston University)

  • Görg, Holger

    (Kiel Institute for the World Economy)

  • Lancheros, Sandra

    (University of Nottingham)

Abstract

We implement a method to estimate the direct effects of foreign-ownership on foreign firms' productivity and the indirect effects (or spillovers) from the presence of foreign-owned firms on other foreign and domestic firms' productivity in a unifying framework, taking interactions between firms into account. To do so, we relax a fundamental assumption made in empirical studies examining a direct causal effect of foreign ownership on firm productivity, namely that of no interactions between firms. Based on our approach, we are able to combine direct and indirect effects of foreign ownership and calculate the total effect of foreign firms on local productivity. Our results show that all these effects vary with the level of foreign presence within a cluster, an important finding for the academic literature and policy debate on the benefits of attracting foreign owned firms.

Suggested Citation

  • Girma, Sourafel & Gong, Yundan & Görg, Holger & Lancheros, Sandra, 2014. "Estimating Direct and Indirect Effects of Foreign Direct Investment on Firm Productivity in the Presence of Interactions between Firms," IZA Discussion Papers 8509, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp8509
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    JEL classification:

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

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