A question of enduring interest within international business is to what extent the presence of foreign firms can create positive ‘spillovers’ that boost the productivity of domestic firms.  Foreign multinational enterprises (MNEs) try to limit such positive spillovers to their competitors, while governments worldwide remain keen to attract and facilitate foreign direct investment (FDI), in part to secure positive spillovers to domestic firms.  Empirical studies on horizontal or intra-industry spillovers (i.e. from foreign firms to domestic competitors) show mixed results.

Professor Sara McGaughey from the Department of Business Strategy and Innovation, along with colleagues Pascalis Raimondos and Lisbeth la Cour, shed new light on this issue.  In their recent study  they revisit the historical distinction between ‘control’ and ‘influence’ by the foreign owner and ask: How does the presence of ‘controlled’ (compared to non-controlled) foreign firms affect the productivity of domestic firms in the same industry?

The authors identify a ‘paradox of control’ and argue that that ‘controlled’ foreign firms (i.e. foreign ultimate owner holding 50% or more of voting shares) will generate larger productivity spillovers than non-controlled foreign firms. 

Whereas prior studies tend to use only foreign direct investment links, the research team pay careful attention to how a firm is classified as ‘foreign’ and take into account both direct and indirect ownership links. They use a firm-level panel dataset of 575,844 manufacturing firms (2,343,495 observations) across 20 European countries to test their proposition. 

Allowing for indirect ownership turns out to be pivotal: they uncover double as many foreign firms than with the conventional use of only direct foreign ownership links! 

Notably, it is the ‘new’ foreign firms that have the greatest effect on the productivity of domestic firms in the same industry. These firms would be classified as domestic in studies using only direct ownership data, thereby stacking the cards against finding positive spillovers.

The implications of the study extend beyond productivity spillovers to areas such as cross-border mergers and acquisitions, joint ventures, multinational enterprise strategies of legitimation, and corporate groups.

Please click here to read the full “Foreign influence, control, and indirect ownership: Implications for productivity spillovers” article published in the Journal of International Business Studies, written by Sara McGaughey (Griffith University), Pascalis Raimondos (Queensland University of Technology), and Lisbeth la Cour (Copenhagen Business School).