Origin of foreign direct investment and firm performance: Evidence from foreign acquisitions of chinese domestic firms

Abstract

Using a newly created panel of domestic Chinese firms who receive foreign direct investment (FDI), this paper finds that Organisation of Economic Cooperation and Development (OECD)-acquired firms outperform those acquired by investors from Hong Kong, Macao and Taiwan (HMT). To control for possible endogeneity of the FDI decision, I employ propensity score matching combined with a difference-in-differences approach. The results indicate that relative to HMT-acquired firms, OECD-acquired firms experience significantly higher productivity in the initial year of acquisition and this productivity differential persists in subsequent years, reaching 27.8 per cent by the third year. Further, OECD-acquired firms exhibit higher profits, average wages and capital per worker compared to HMT-acquired firms. These results suggest that the origin of the foreign investor differentially affects target firm performance.