Foreign ownership and productivity: Is the direction of causality so obvious?

This paper estimates the effect of foreign ownership on productivity in a very general setting where all potential endogeneity sources are controlled for. In particular we apply the GMM-System estimator to estimate TFP for a large sample of firms located in Italy. After controlling for unobserved heterogeneity, input simultaneity and measurement errors, foreign ownership has no effect on productivity. When we also control for the simultaneity of the ownership variable we find that nationality matters since firms under US ownership tend to be more productive than firms under national ownership. Therefore we do not find widespread empirical support to the standard internalization theory of foreign direct investment. In particular, the transfer of technology seems to occur only if the difference between the recipient and the investment country is sufficiently pronounced. Our results also highlight the importance of controlling for simultaneity of the foreign ownership variable. (c) 2005 Elsevier B.V. All rights reserved.