Foreign firms and host-country productivity : does the mode of entry matter?

Abstract

Foreign direct investment is considered an important source of knowledge spillovers. We argue that the effects of foreign presence on host-country productivity may differ depending on the mode of foreign entry. Using a long panel from the Norwegian Manufacturing Census, we find that greenfield entry both in the same industry and in the same labour market region has a negative impact on the productivity of domestic plants, while entry via acquisition affects the productivity of domestic plants in the same industry positively. The positive effect from acquisitions is consistent with knowledge spillovers as these plants have pre-established linkages within the industry. The negative effects from greenfield entry can be attributed to increased competition both in the product market and for qualified employees in a tight labour market. Our results help to explain the ambiguity of results in the empirical literature that relates overall foreign presence to host-country productivity.