To what extent does Foreign Direct Investment create spillovers that boost the productivity of domestic businesses? Economics Explored host Gene Tunny speaks with the authors of a recent study addressing this question: Sara McGaughey, soon to take up a position as Professor at Copenhagen Business School, and Professor Pascalis Raimondos, Head of the School of Economics and Finance at QUT Business School in Brisbane, Australia. 

Sara and Pascalis have taken advantage of the huge Orbis business database which has allowed them to construct a panel dataset of nearly 576,000 manufacturing firms across 20 European countries. They find evidence that controlled foreign firms can boost the productivity of other firms in the same industry (horizontal spillovers), while previous studies had only convincingly found evidence of vertical spillovers, between foreign affiliates and their domestic suppliers. 

The study is titled Foreign Influence, control, and indirect ownership: Implications for productivity spillovers and was published in July 2020 in the Journal of International Business Studies.

The authors can be contacted regarding their research via [email protected]

To get in touch with Gene,  and to ask any questions or provide any comments or suggestions, please email him via [email protected]

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Note from Pascalis and Sara on examples of indirectly controlled firms

Below are two examples from our dataset where the foreign subsidiary is immediately owned by a firm resident in the same country, but ultimately owned (i.e. controlled with more than 50% voting equity) by a single foreign owner (i.e. the ultimate owner).  

In studies that look for an immediate direct foreign owner (rather than the ultimate owner) to identify a firm as ‘foreign’, our example firms will be classified as domestic – leading to significant mis-categorisation of what is a foreign firm.

As you can see from our ‘egg’ figure in the paper, there are just as many of these ‘typically hidden’ foreign firms as those captured under an ‘immediate direct foreign owner’ definition. 

EXAMPLE 1

Name: GTS Industries
ID: FR331620096
Country: France
Owner ID: FR562094425
Owner Name: ARCELORMITTAL FRANCE
Owner Country: France
The biggest direct owner is registered in France. Hence the company would be defined as domestic under the traditional (10%, influence) definition
Ultimate Owner ID: DE7290116150
Ultimate owner name: DHS DILLINGER HUETTE SAARSTAHL AG
Ultimate Owner country: Germany

EXAMPLE 2

Name: STE DES ACIERS D'ARMATURE POUR LE BETON (SAM)
ID: FR389517061
Country: France
Direct Owner: River Acier
Direct Owner ID: FR344733803
Direct Owner country: France
Direct owner in the same country as the company, wherefore it is defined as domestic
Ultimate owner:  ITMI0840952
Ultimate owner name: Riva Family (PARTECIPAZIONI INDUSTRIALI S.P.A.)
Ultimate owner country: Italy