As mentioned in Section III, targets of foreign acquisitions become integrated in global value chains, which increases their export intensity and reliance on imported inputs (measured as the share of imports in inputs). Arnold and Javorcik (2009) find that in Indonesia, three years after the ownership change, export intensity increased by almost 14 percentage points, while the share of imports in inputs increased by 11 percentage points.
The presence of foreign affiliates may also boost exports of local producers through knowledge spillovers about export markets. Aitken, Hanson, and AE Harrison (1997)’s study of over 2,000 Mexican manufacturing plants demonstrates that the presence of exporting multinationals in the same region reduces the export costs for Mexican firms, but no such externalities are found for exporting firms in general. Using detailed Chinese trade statistics identifying the type of exporters and their location, Chen (2011) find that the presence of foreign affiliates in the same sector is associated with more frequent and higher unit value trade transactions by Chinese firms. Using the same dataset, Swenson (2008) shows that information spillovers can explain the positive association between the presence of foreign affiliates and new export connections by private Chinese exporters.
The impact of FDI inflows can be so large that it is visible at the aggregate level. Export superstars (firms that are born big, start out being highly productive, and grow fast) drive exports in novel sectors in developing countries. Often it is just a handful of firms - most frequently foreign multinationals - that fundamentally restructure sectoral export patterns (Freund and Pierola 2015, Freund, Fernandes, and Pierola 2016). In Freund and Moran (2017)’s review of case studies in Malaysia, Costa Rica, and Morocco, the authors conclude that "the objective of generating exports - in particular, exports in novel sectors - is more likely to come about by overcoming market failures and other obstacles that hinder multinational investment than by promoting domestic entrepreneurship."
The same picture emerges from Harding, Javorcik, and Maggioni (2019)’s cross-country analysis of sectorspecific FDI promotion efforts undertaken by national investment promotion agencies in 77 developing countries during 1984-2006. Their focus on investment promotion activities rather than actual FDI inflows is justified on three grounds: a lack of comprehensive data on FDI flows disaggregated by sector, country and time, focusing on policy choices attenuates endogeneity concerns (reverse causality between high unit values and high FDI inflows), and the effectiveness of investment promotion policies makes them a good proxy for actual FDI inflows (see Section VIII for a discussion). The study exploits within-country variation in the FDI targeting practices across sectors and time to identify its impact on the country’s export structure, while accounting for heterogeneity specific to country-product, country-year, and product-year combinations. The authors conclude that products belonging to sectors targeted by investment promotion efforts experience an increase in exports and revealed comparative advantage (measured by the RCA index). Similarly, Harding and Javorcik (2012) examine the relationship between unit values of exports at the product level and FDI promotion efforts undertaken by national investment promotion in the sector to which a given product belongs. Their sample covers 105 countries from 1984 to 2000, and their findings are consistent with a positive effect of FDI on unit values of exports in developing countries.
The impact of multinational presence on the quality of exports is also documented in a micro-level study by Bajgar and Javorcik (n.d.), who use customs data from Romania and firm-level information for 2005- 2011. They find a positive relationship between the quality of products exported by Romanian firms and the presence of multinational enterprises in the upstream (input-supplying) industries. Export quality is also positively related to multinational presence in the downstream (input-sourcing) industries and the same industry, but these relationships are less robust. These conclusions hold both when the product quality is proxied with unit values and when it is estimated following the approach of Khandelwal, Schott, and Wei (2013).
