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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of International Economics, Volume 79, Issue 1, September 2009, Pages 42–53
This paper analyzes the causal relationship between foreign ownership and various aspects of plant performance using micro data from the Indonesian Census of Manufacturing. It examines the implications of foreign ownership in two different contexts: foreign acquisitions and foreign privatizations. To control for the possible endogeneity of FDI decision propensity score matching is combined with a difference-in-differences approach. The results indicate that foreign ownership leads to significant productivity improvements in the acquired plants. The improvements become visible in the acquisition year and continue in subsequent periods. After three years, the acquired plants exhibit a 13.5% higher productivity than the control group. The rise in productivity is a result of restructuring, as acquired plants increase investment outlays, employment and wages. Foreign ownership also appears to enhance the integration of plants into the global economy through increased exports and imports. Finally, productivity improvements and evidence of restructuring are also found in the context of foreign privatizations.
Conventional wisdom suggests that multinational companies are different from other firms. They tend to operate in industries where intangible assets, such as patents, new technologies and well established brand names, play an important role. In fact, they are responsible for most of the world's R&D expenditure (UNCTAD, 2005). They tend to be heavily involved in international trade and often establish production and distribution networks spanning multiple countries or even continents. And perhaps more importantly, multinationals outperform their competitors at home as well as in host countries in terms of productivity. The differences in characteristics of foreign affiliates and indigenous firms have been documented in numerous econometric studies.1 But is the superior performance of foreign affiliates due to the intrinsic advantages of a ‘pushy’ foreign parent company, or are foreign investors simply good at picking the best performing local plants as acquisition targets (the ‘gifted kids’ in our metaphor)? Recently, the application of sophisticated econometric techniques to longitudinal micro data has cast some doubt on an intuitive positive answer to the former question, often taken for granted by economists and policymakers.2 As Harris and Robinson (2003) remark, if foreign ownership per se is not associated with a productivity advantage, “then it is difficult to see how foreign direct investment (FDI) can have a positive impact on overall (..) productivity and thus growth” in the host country. While the present analysis cannot provide an answer to the question of how foreign ownership affects firms that do not receive FDI, it is nonetheless hard to imagine positive spillover effects unless foreign ownership is beneficial to those plants that are directly affected. The existing literature has focused mainly on the link between FDI and productivity neglecting the examination of other aspects of firm operations, which arguably are equally important. For instance, is there a causal relationship between foreign ownership and output growth, capital- and skill-intensity, reliance on export markets and imported inputs? If foreign ownership leads to a better performance, how does it happen? Is it related to restructuring, downsizing or lessening credit constraints? This study analyzes a causal link between foreign ownership and different aspects of plant performance in Indonesia. Our analysis differs from the existing literature in three respects. First, rather than focusing on the narrow question of productivity, we consider a wider range of outcomes which can potentially be influenced by foreign owners. This allows us to understand what kind of changes are introduced (or not) by foreign owners and how they may translate into higher productivity. Second, we examine the implications of foreign ownership in two different contexts: foreign acquisitions and foreign privatizations.3 Third, our analysis has an explicit focus on the direction of causality. Disentangling correlation and causality in the context of foreign acquisitions and privatizations poses numerous challenges. If high productivity plants are chosen by foreign investors as acquisition targets, the ownership status becomes endogenous and a simple least-squares estimation invalid. This is why we use propensity score matching to assess the causal effect of foreign ownership on plant performance. The matching technique creates the missing counterfactual of an acquired plant had it remained under domestic ownership. It does so by pairing up each plant that will receive FDI in the future with a domestic plant with very similar observable characteristics operating in the same sector and year, where similarity is determined on the basis of those plant characteristics that have explanatory power in the acquisition decisions. Propensity score matching is then combined with a difference-in-differences approach. The causal effect of foreign ownership is hence inferred from the average divergence in the productivity paths between each acquired plant and its matched control plant, starting from the pre-acquisition year. This strategy allows us to control for observable and unobservable but constant differences between the acquired and the control plants. A similar challenge exists in the context of privatizations, and a similar solution is employed. Our difference-in-difference inferences on the matched sample comprise between 297 and 400 acquisition cases. Our analysis, based on the plant-level data from the Census of Indonesian Manufacturing Plants, covering the period 1983–2001, shows that foreign ownership leads to significant and wide-ranging changes to plant operations and results in a higher total factor productivity (TFP) and a higher labor productivity. Our results suggest that the impact on productivity is a level rather than a growth effect. Our analysis of acquisitions suggests that while better performing plants are more likely to be acquired by foreign interests, foreign ownership leads to a better performance in terms of TFP and labor productivity. The improvement is on the order of 13.5% for TFP and 63% for labor productivity. The productivity boost is achieved through restructuring involving an increase in the scale of production, hiring new labor, paying higher wages, massive investment in fixed assets, and in particular in machinery, and increased reliance on imported inputs and export markets.4 Foreign ownership does not appear to affect capital- and skill-intensity. This suggests that new foreign owners may be introducing organizational and managerial changes that make the production process more efficient by reducing waste and using labor more effectively. Another possibility is that while foreign owners do not alter the skill composition of labor, they are able to attract the most experienced and motivated workers from local plants, which is in line with the observation that acquired plants hire a large number of new employees and raise the average wage. Yet another possibility is that the use of higher quality inputs or more suitable parts and components enhances productivity. This possibility is supported by the observation of FDI leading to a greater reliance on imported inputs. The positive effect of foreign ownership on plant TFP is found for acquisition targets which export while under foreign ownership as well as for those that do not do so. This gives us confidence that our findings cannot be attributed to higher mark-ups producers may enjoy in export markets. It also suggests that FDI induces changes that go much beyond the creation of new markets for the plant's products. The results for foreign privatizations are broadly similar to those found in the context of foreign acquisitions. We find that foreign privatizations result in a better performance than domestic privatizations. Two years after the ownership change, foreign privatizations lead to a 27% TFP premium relative to domestic privatizations. The difference is even larger (54%) when labor productivity is considered. Foreign privatizations also result in higher output. In contrast to foreign acquisitions, foreign privatizations do not lead to higher employment. The lack of appetite of foreign owners for increasing employment may be due to the fact that publicly-owned companies are often overmanned. Where foreign owners do make a difference is the average wage and the skill composition of labor. Foreign ownership leads to an 8 percentage point higher share of skilled workers. The remainder of the paper is structured as follows. The next section reviews the existing literature. Section 3 outlines our empirical strategy for identifying the causal relationship of foreign acquisitions, while Section 4 describes the Indonesian Census of Manufacturing. Section 5 explains the details of propensity score matching and the difference-in-differences technique. Section 6 presents the main results and a set of robustness checks. Section 7 focuses on foreign privatizations, and the final section concludes.
نتیجه گیری انگلیسی
A large empirical literature searches for a link between foreign direct investment and economic growth that goes beyond the contribution of multinationals to investment in physical capital. Implicit to this analysis lies the assumption that foreign ownership per se brings some intangible advantages that enhance economic growth and whose proximity can be beneficial to domestic producers. If, however, foreign investors are mainly good at choosing the best domestic firms as acquisition targets, this assumption may not hold true. This study aims to shed some light on this issue by examining the causal relationship between foreign ownership and plant performance in a Census of Indonesian Manufacturing Plants. We identify causality by controlling for the possible endogeneity of plant ownership status, using a difference-in-differences approach in combination with propensity score matching. Our analysis differs from the existing literature in three ways. First, rather than focusing on the narrow question of productivity, we consider a wider range of outcomes that can potentially be influenced by foreign owners. This allows us to understand what kind of changes is introduced by foreign owners and how they may translate into higher productivity. Second, we examine the implications of foreign ownership in two different contexts: foreign acquisitions and foreign privatizations. While comparing these settings is interesting in its own right, obtaining consistent findings from both gives us confidence that we are drawing the right conclusions from our findings. Third, our analysis has an explicit focus on the direction of causality. Our results can be summarized as follows. First, the evidence on foreign acquisitions shows that foreign ownership leads to significant productivity improvements in the acquired plants. The improvements become visible in the acquisition year and continue in subsequent periods. After three years, the acquired plants exhibit a 13.5% higher productivity than the control group. The rise in productivity is a result of restructuring, as acquired plants increase investment outlays, employment and wages. Foreign ownership also appears to enhance the integration of plants into the global economy through increased exports and imports. Second, productivity improvements and evidence of restructuring are also found in the context of foreign privatizations. Many developing countries strive to attract FDI inflows in the hope of stimulating economic growth through knowledge transfer. Our results strengthen the view that foreign ownership per se lies at the root of substantial benefits for plant performance in Indonesia and other developing countries. This finding is important, as the existence of a positive direct effect is a precondition for knowledge spillovers from FDI. Although the evidence of such spillovers is mixed ( Haddad and Harrison, 1993 and Aitken and Harrison, 1999), recent studies with a focus on vertical spillovers have identified positive effects of FDI further down the value chain (Javorcik, 2004), also in Indonesia (Blalock and Gertler, 2008). Such spillover effects, however, would be hardly credible if there was not a causal link between FDI and above-average performance. This paper has provided evidence that foreign ownership can indeed be at the root of high performance in developing economies such as Indonesia.