The Heterogeneity of Foreign Direct Investors: Linking Affiliates to Parent Productivity

Abstract

We investigate the heterogeneity within the group of foreign direct investors and the relation between affiliates characteristics and parent productivity. Using data on Italian firms, we show that foreign direct investors differ in their productivity level according to their characteristics and their investment decisions. Larger parents by employment or sales tend to be more productive, to have more affiliates and to invest in a higher number of destinations. Focusing on manufacturing firms, we show econometrically that having more and larger affiliates in rich countries leads to higher ex-post productivity. In particular, investing in high income countries or both in high and low income countries is associated with a subsequent productivity premium \textit{vis-\`a-vis} low income countries investors, especially for larger parents. Low income countries investors are found to be relatively more productive when operating in low technology sectors, while the opposite applies to high income countries investors.