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Discussion Paper Details

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Title: What is a foreign firm? Implications for productivity spillovers

Author(s): Lisbeth La Cour, Sara McGaughey and Pascalis Raimondos

Publication Date: June 2018

Keyword(s): control vs influence, direct vs. ultimate owner, Foreign direct investment, indirect ownership links and productivity spillovers

Programme Area(s): International Trade and Regional Economics

Abstract: When searching for productivity spillovers from foreign firms, a firm is typically classified as foreign using a low threshold of direct foreign ownership. Instead, we advocate an `ultimate owner' definition because (i) ultimate ownership includes indirect ownership links that are prevalent in our complex, interdependent world; and (ii) it confers control. Control brings greater willingness to transfer knowledge to foreign affiliates but, paradoxically, also greater potential for spillovers. Adopting this alternate definition of what is foreign turns out to be pivotal for identifying spillovers: while we find no horizontal productivity effects using the low threshold direct ownership definition, we find positive and significant effects under the ultimate-owner definition. Moreover, we find evidence that indirectly controlled foreign firms exert the most persistent horizontal spillovers to domestic firms.

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Bibliographic Reference

La Cour, L, McGaughey, S and Raimondos, P. 2018. 'What is a foreign firm? Implications for productivity spillovers'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12978