Foreign ownership and productivity: new evidence from the service sector and the R&D lab

Abstract

This paper examines the relationship between foreign ownership andproductivity, paying particular attention to two issues neglected in the existing literature ?the role of multinationals in service sectors and the importance of R&D activity conductedby foreign multinationals. We review existing theoretical and empirical work, whichlargely focuses on manufacturing, before presenting new evidence using establishmentleveldata on production, service and R&D activity for the United Kingdom. We find thatmultinationals play an important role in service sectors and that entry of foreignmultinationals by takeover is more prevalent than greenfield investment. We find thatBritish multinationals have lower levels of labour productivity than foreign multinationals,but the difference is less stark in the service sector than in the production sector, and thatBritish multinationals have lower levels of investment and intermediate use per employee.We also find that foreign-owned multinationals conduct a substantial amount of UK R&D.We discuss the implications of these and other findings for the policy debate on incentivesto influence multinational firms? location choices. This paper examines the relationship between foreign ownership andproductivity, paying particular attention to two issues neglected in the existing literature ?the role of multinationals in service sectors and the importance of R&D activity conductedby foreign multinationals. We review existing theoretical and empirical work, whichlargely focuses on manufacturing, before presenting new evidence using establishmentleveldata on production, service and R&D activity for the United Kingdom. We find thatmultinationals play an important role in service sectors and that entry of foreignmultinationals by takeover is more prevalent than greenfield investment. We find thatBritish multinationals have lower levels of labour productivity than foreign multinationals,but the difference is less stark in the service sector than in the production sector, and thatBritish multinationals have lower levels of investment and intermediate use per employee.We also find that foreign-owned multinationals conduct a substantial amount of UK R&D.We discuss the implications of these and other findings for the policy debate on incentivesto influence multinational firms? location choices.

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