Foreign Ownership and Productivity: A Comparative Study of Estonia, Latvia and Norway

Abstract

While attracting foreign direct investments (FDI) has been at the core of the economic policy of many countries since the 1980s, existing evidence of a causal foreign ownership effect on firm-level productivity is mixed. This paper revisits the productivity effect of foreign takeovers on domestic firms. Leveraging administrative firm-level data from Estonia, Latvia, and Norway, we shed some light on the following key questions: 1) “Does the magnitude of the effect of foreign ownership depend on the host country’s level of development?;” 2) “Does spatial, cultural, and economic proximity between the sending and receiving countries play a role in the foreign ownership effect?;” and 3) “To what extent are these effects heterogeneous across industries?” By implementing a propensity score matching procedure, combined with a difference-in-differences approach, our results indicate that the productivity effect of foreign ownership greatly varies across host countries, sectors and FDI’s region of origin. We document an overall positive but heterogeneous effect of foreign acquisitions on domestic firms, with a stronger productivity boost in Estonia and Latvia than in Norway. The effects in each country are concentrated on FDI from particular regions and specific economic sectors. These results suggest that the positive effect of FDI on receiving companies is conditional on both the characteristics of the investor and the acquisition target.