III. Foreign affiliates benefit from continuous injections of knowledge from headquarters

The literature discussed in Sections I and II has documented a positive effect of foreign ownership on firm performance. But is this effect due to a one-time knowledge transfer or does it rely on continuous injections of knowledge? This question matters for designing investment promotion policies, as it determines how the benefits of FDI inflows evolve over a foreign affiliate’s lifetime.

To shed light on this question, Javorcik and Poelhekke (2017) focus on divestments (foreign affiliates that are sold to local owners) and compare their performance to a carefully chosen group of plants that continue operating under foreign ownership. Their study of 157 cases of divestment of Indonesian manufacturing plants finds that divestment is associated with a drop in total factor productivity accompanied by a decline in output, markups, and export and import intensity. Non-exporting foreign affiliates that are divested show similar patterns, suggesting that the loss of export markets cannot entirely explain this worsened performance. These findings are consistent with the benefits of foreign ownership being driven by continuous supply of headquarter services from the foreign parent.

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