Productivity Gaps, Inward Investments and Productivity of European firms

Using a balanced panel of firm-level data on the manufacturing industry in France, Italy and Spain over the 1993-1997 period, this paper examines the impact of foreign presence on the productivity of domestic enterprises. We innovate on existing literature by using firm-level data comparable across countries. A generalisation of the results obtained for individual countries is attempted by introducing two key variables in the analysis of the impact of inward investments on domestic performances: productivity gaps between foreign and domestic firms, and productivity levels of MNEs. It is shown that it is the combination of high gaps and high levels of foreign productivity that has the most positive effects. This leads to a critical consideration of both the “catching up” hypothesis, which identifies a positive relation between the size of technological gaps and growth opportunities induced by foreign investments; and the “technological accumulation” hypothesis, which stresses the role of domestic absorptive capacity and of coherence between foreign and domestic technology as determinants of virtuous effects of inward investments. Based on these results, policy implications are drawn, concerning the selection and promotion of inward investments in advanced countries.