Investigating the link between foreign ownership and firm performance – an endogenous threshold approach

Abstract

Purpose This paper aims to examine the relationship between foreign ownership and firm performance, using an approach which the authors show is more advanced than existing methods, and more aligned with accepted theory and conceptual frameworks developed in international business. The authors demonstrate that simply relying on a binary distinction between foreign and domestic firms ignores much of the information regarding the importance of ownership structure and is disconnected from the wider literature on ownership structure, motivations for Foreign Direct Investment (FDI) and performance. Design/methodology/approach The authors illustrate this by using a threshold estimation method to endogenously uncover the level of foreign ownership up to which the transfer of foreign firm advantage from the parent company to the affiliate is the strongest. Findings The results show that for Germany, Poland, Italy and the UK, there are significantly different thresholds of foreign ownership over the period, 2001-2010. Due to non-linearities and different thresholds, the authors argue that before one can entertain secondary considerations concerning foreign firm impact on host countries, one needs to apply the appropriate approach. Originality/value This is the first paper that uses an endogenous threshold approach on a large firm level data set to show that there are significant differences and non-linearities in the relationship between foreign ownership and productivity.