Foreign Direct Investment And Firm Performance

Foreign direct investment has been playing an important role in the economic growth of host economies.Multinationals bring not only technology and management expertise but also help to integrate the host economy to the international market.This paper attempts to provide firm-level evidence on how FDI brings market integration effect,technology spillover effect,and capital accumulation effect to firms of host economies,from a foreign acquisition angle,entry mode choice,and capital reinvestment.The paper started by establishing causal relationships between foreign acquisition and various aspects of target firms like the likelihood of importing and exporting,the variety of goods traded,the adjustments of overseas markets,and target firms' performance;Then the paper attempts to examine how the presence of FDI affects the productivity of domestic firms,paying particular attention to the role of ownership structure in foreign-invested firms.Last,the paper is intended to identify firms reinvesting behavior and tries to establish causal linkages between parents' reinvesting behavior and affiliates' performance,which help to shed light on the role of capital reinvesting behavior on capital accumulation,as well as sustainability of FDI technology spillover effects.The paper has several important findings.First,foreign acquisitions help to integrate the target firm to overseas markets by increasing the probabilities of importing and exporting,increasing product varieties,and enlarging the geographic distance of importing markets as well as export destination markets,as a result,affiliates' performance significantly improved.Second,ownership structure plays an important role in determining the magnitude of spillover effects on domestic firms.The presence of JVs associates positively,while the presence of wholly foreign-owned firms associated negatively with domestic firm productivity.The relationships are causal as indicated by the two-stage least square regressions.Third,reinvestment behavior by the multinational parent helps to contribute to capital accumulation in the host country.Affiliates that receive reinvested capital from the parent experience increases in firm productivity,sale revenue,and innovation capacity.As for the mechanism,the paper finds that reinvested affiliates have a significantly higher scale of intangible assets,R&D and training expenditure,and financial liquidity.Last,affiliates that experience foreign capital withdrawal see declines in their firm productivity,sales revenue and export,and the negative impact persists to later periods after foreign divestment happened.This paper contributes to the literature in the following aspects.First,the paper provides evidence on how foreign direct investment helps to integrate firms in the host countries to international markets.Multinationals operate across national borders.To what extent do firms in host countries benefiting from multinational production and distribution networks,the literature provides little evidence.This paper uses a merged data by combining a manufacturing firm-level dataset and custom dataset and provide a detailed answer to this question.Second,the FDI spillover effect literature stated mixed evidence on the existence of positive or negative multinational externalities.The paper argues that this line of research missed the role of ownership structure,and find that both positive and negative spillover effects exist in the Chinese manufacturing sector.Third,this paper provides theoretical foundation and explanation to why governments in host countries make multinational reinvestment as a priority in attracting foreign direct investment,it finds that reinvestment by multinational parents contributes to capital accumulation in developing countries like China.Fourth,this paper contributes to the literature by discussing the sustainability of technology spillover effect from a foreign divestment perspective,and find that the ownership advantage of foreign affiliates in China is dependent on the foreign shareholding of multinational parents.These findings help to shed light on how to formulate better FDI policies,as China enters into a new stage of economic development.This paper provides us with new perspectives in understanding how FDI help domestic firms expand their overseas market and improve their performance,how reinvestment behavior initiated by MNE headquarters help to enhance or decrease affiliates' performance,and how FDI with different ownership structures faciliates or hinders domestic firms to reap spillover effects.The findings in this paper provide policy and theoretical guidance for the government to design more effective FDI policy,under the "New-Normal" stage of economic development.