Foreign Influence, Control, and Indirect Ownership: Implications for Productivity Spillovers

Sara L. McGaughey*, Pascalis Raimondos, Lisbeth la Cour

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

How does the presence of ‘controlled’ foreign firms affect the productivity of domestic firms in the same industry? We revisit the historical distinction between control and influence by the foreign owner and define ‘controlled’ foreign firms as those with a foreign ultimate owner holding 50% or more of voting shares. Connecting insights from new internalization theory with knowledge-based views of the MNE, we posit that ‘controlled’ foreign firms will generate larger productivity spillovers than non-controlled foreign firms. We use a firm-level panel dataset of 575,844 manufacturing firms (2,343,495 observations) across 20 European countries to test our proposition. We pay careful attention to how firms are categorized as foreign, taking into account both direct and indirect ownership links. Allowing for indirect ownership turns out to be pivotal: there are just as many indirectly controlled foreign firms as foreign firms captured with direct ownership data. We find positive horizontal spillovers from controlled foreign firms and zero spillovers from non-controlled foreign firms. Interestingly, the strongest positive spillovers come from the indirectly controlled foreign firms. The implications of our study extend beyond productivity spillovers to areas such as cross-border M&As, joint ventures, MNE strategies of legitimation, and corporate groups.
Original languageEnglish
JournalJournal of International Business Studies
Number of pages22
ISSN0047-2506
DOIs
Publication statusPublished - 20 Jul 2020

Bibliographical note

Epub ahead of print. Published online: 20 July 2020

Keywords

  • Foreign direct investment
  • Knowledge and productivity spillovers
  • Ultimate owner
  • New internalization theory
  • Paradox of control
  • History of FDI and the MNE

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