DFI boosts productivity but only that of the smaller enterprises
A great deal is being heard in Greece lately about the benefits of direct foreign investment (DFI). The measurement of such benefits has long been a popular subject in international economics. The relevant discussion is dominated by two opposite effects of DFI. Firstly, foreign investment is usually accompanied by an upgrade in technology. This boosts the productivity and efficiency of the firms that receive it, but also, indirectly, of the economy as a whole, due to its diffusion in the long term. Secondly, domestic enterprises come under strong competitive pressure from the foreign newcomers which make inroads into their market shares; they gradually see their average costs rise and are forced into closure. Which of the two effects is stronger determines the net effect of DFI on the economy, and depends on many factors, including the already existent level of technology, structural weaknesses and the legislation in the recipient country. Over the last four years, the Economic Policy Laboratory of the Athens University of Business and Economics (www.aue.gr/imop) has participated in a European program that aims to analyze DFI and the role of multinationals in host countries. One finding has been that the small number of partially or wholly owned foreign firms in manufacturing (5 percent) have market shares more than five times as large as the local businesses. The productivity of foreign firms is almost double that of domestic enterprises and rises along with the shares of foreign ownership. Moreover, for each 10 percent increase in proportion of foreign ownership, total productivity in manufacturing rises by 2.3 percent, ceteris paribus; the benefit seems to be entirely derived from firms that are fully or majority foreign-owned and employ over 50 people. However, the results show that only the small firms benefit from technological diffusion: For each 10 percent increase in foreign ownership, their productivity increases by 14 percent, while the big firms receive negligible effects. Further analysis shows that if the focus of interest is on the diffusion of technology, which has a more permanent impact on the economy, the small, minority-owned foreign enterprises must be favored, as they seem to be more actively involved with their domestic peers. Such estimates could be translated into the following policy proposals: In small economies, such as Greece’s, large manufacturing concerns are already acquainted with the competitive pressure of foreign markets (due to imports or exports) and do not seem to be appreciably influenced by foreign firms. By contrast, small domestic enterprises are those that benefit most from the diffusion of new technologies and enjoy the biggest boosts in productivity. When technology originates in small, minority-owned foreign firms, the effects of the diffusion are stronger. Attracting such firms seems to be more beneficial and easier for the Greek economy. (1) E. Louri-Dendrinou is a professor at the Athens University of Economics and Business.
