New Research Article on Productivity and Inward Foreign Direct Investment

Vista Analyse contributes to the new research article “Foreign Ownership and Productivity: A Comparative Study of Estonia, Latvia and Norway” in the “Taylor and Francis” journal “Eastern European Economics”. The article addresses the heterogeneity in productivity impulses in Northern European firms from inward foreign direct investment.

“Productivity growth and internationalization are two key themes for further economic development in Norway, as well as internationally. We are excited to delve into these topics. I would like to take the opportunity to thank my co-authors for a great collaboration”, says Rasmus Bøgh Holmen, who has represented Vista Analyse in the study.

The article is written in collaboration with Gaygysyz Ashyrov at Estonian Business School, Jaan Masso at the University of Tartu, Kjetil Haukaas at Eika, and Nicolas Gavoille at Stockholm School of Economics in Riga.

– Studying Productivity Impulses across Several Dimensions

The attraction of foreign direct investment (FDI) has been central in the economic policies of many countries since the 1980s. However, the existing documentation of a causal effect of foreign ownership on productivity at the firm level is mixed.

The study combines the research designs "propensity score matching" and "difference-in-differences." While the former ensures that similar firms are compared to each other, the latter allows for the timing of investments to be utilized.

The study’s empirical analysis uses data from Estonia, Latvia, and Norway. Other key dimensions in the analysis include sector affiliation and the origin region of investments.

– The Benefits Depend on Characteristics of the Investors and Target Firms

The authors document a generally positive, but heterogeneous effect of foreign acquisitions on domestic firms, with a stronger productivity increase in Estonia and Latvia than in Norway. The effects in each country are concentrated on FDI from specific regions and economic sectors. The results suggest that the positive effect of FDI on recipient firms is conditioned by both the characteristics of the investor and the target firm.

Stronger results for Estonia and Latvia may be linked to differences in the countries' stages of development but may also be due to a less extensive dataset for Norway compared to the other countries. Foreign acquisitions of Estonian and Latvian firms have, on average, increased the firms' productivity by 20 to 30 percent in the long term.

Another key question is whether geographic, cultural, and economic proximity between the origin and recipient countries determines the effect of foreign ownership. Northern European investments and knowledge transfer have driven much of the productivity gains in Estonian companies. Investments from the rest of the EEA area and capital relocation have been most important for Latvian companies.