OXFORD REVIEW OF ECONOMIC POLICY, VOL. 20, NO. 3, PP. 440-456
Oxford Review of Economic Policy vol. 20 no. 3 2004 © Oxford University Press and the Oxford Review of Economic Policy Limited 2004; all rights reserved.
Foreign Ownership and Productivity: New Evidence from the Service Sector and the R&D Lab
Institute for Fiscal Studies and University College London
London School of Economics and Institute for Fiscal Studies
Institute for Fiscal Studies1
Abstract
This paper examines the relationship between foreign ownership and productivity, paying particular attention to two issues neglected in the existing literature—the role of multinationals in service sectors and the importance of R&D activity conducted by foreign multinationals. We review existing theoretical and empirical work, which largely focuses on manufacturing, before presenting new evidence using establishment-level data on production, service, and R&D activity for Great Britain. We find that multinationals play an important role in service sectors and that entry of foreign multinationals by takeover is more prevalent than greenfield investment. We find that British multinationals have lower levels of labour productivity than foreign multinationals, but the difference is less stark in the service sector than in the production sector, and that British multinationals have lower levels of investment and intermediate use per employee. We also find that foreign-owned multinationals conduct a substantial amount of British R&D. We discuss the implications of these and other findings for the policy debate on incentives to influence multinational firms' location choices.