Foreign Direct Investment, Performance and Competitive Advantage

Abstract

This thesis presents three essays on the relationship between foreign direct investment (FDI) and performance. It offers new theoretical insights and empirical tests that analyze how performance is driven by competitive advantages, most notably firm-specific assets and multinationality. Using industry-level panel datasets, I explore determinants of profitability and ownership structure of US majority-owned versus non-majority-owned affiliates abroad and the relationship between FDI, research and development (R&D) and industry productivity in the Organization for Economic Cooperation and Development (OECD). The first essay, jointly written with Benjamin Gomes-Casseres and Mauricio Jenkins, explores a striking empirical pattern: US multinationals' majority-owned manufacturing affiliates abroad earned a 6.4% return on assets between 1977 and 2003 compared to 3% for non-majority-owned US ventures abroad. We explain these findings with a new theoretical framework that views the ownership structure and the profitability of a foreign venture as functions of the value created by the "competitive advantages" of the multinational corporation. Our empirical analysis finds that the profitability gap is significantly higher in industries where foreign affiliates of US multinationals generate relatively high sales (including exports) and where US affiliates of their foreign rivals have relatively low sales. We discuss how this sheds new light on the contributions of multinationality and country-firm specific advantages to competitiveness. The second and third essays analyze the relationship between industry-level FDI presence and productivity of all firms in that industry and country. I show that the competitiveness gap between foreign and local firms affects the relationship between FDI and productivity. I suggest that a low competitiveness gap may spur innovation and productivity of all firms more than a large gap. I find that FDI intensity is positively associated with productivity in the OECD. This relationship is significant mostly in industries with high firm-specific advantages (not just those advantages associated with R&D). In my results for the new OECD members from Central Europe, the lagged impact of FDI on productivity growth was strongly positive.