Entry of Foreign Multinational Firms and Productivity Growth of Domestic Firms: The case for Japanese firms

This paper examines whether and how the entry of foreign multinational firms affects the productivity growth of domestically owned firms, using Japanese firm-level data for the period 2000-2007. The data are taken from the comprehensive annual survey by the Japanese government, which covers firms in the manufacturing industries, wholesale and retail trade, information services, business services, and other service industries. Although many previous studies have conducted productivity analyses on foreign multinationals and domestic firms in the manufacturing sector, such analyses for the service sector are still scarce. This paper focuses on the service sector, taking account of the importance of foreign entry in this sector, where cross-border trade is occasionally difficult and firms are therefore less likely to be exposed to international competition.

The analysis of this paper reveals that foreign multinationals perform better than domestically owned firms in many sectors. Although the productivity levels of the former tend to be higher than the latter, a significant difference in productivity growth rates is not confirmed. Moreover, a foreign presence in a particular industry tends to be viewed as a factor that negatively affects the productivity growth rate of domestically owned firms in the same industry, when firm-fixed effects are controlled for. However, firms that are catching up with frontier productivity can receive positive FDI spillovers, implying that foreign entry accelerates the catch-up phenomenon.