1. 1 The contribution of foreign affiliates to productivity growth: evidence from OECD countries Chiara Criscuolo Economic Analysis and Statistics Division EUKLEMS 2nd Consortium Meeting 10 th June Helsinki

2. 2 Motivation Increased importance of foreign direct investment Countries compete with each other to attract foreign Multinationals (MNEs) Why? MNEs have firm specific advantage Direct positive effect on the host countrys economy Indirect effect: knowledge spillovers, increased competitive pressure on domestic firms

3. 3 What do we do? This is the first comparative study that examines the direct contribution of foreign affiliates to the labour productivity growth of the host economy in OECD countries. We quantify this contribution at the aggregate manufacturing and services sectoral level and at a more disaggregated sectoral level using a growth accounting approach. We break down this contribution in two effects: Within effect Between effect

4. 4 The Data… … contains: sectoral level information on the activity of affiliates of foreign multinationals in OECD countries from: –Activity of Foreign Affiliates (AFA) database for the manufacturing sector –Foreign Affiliates Trade in Services (FATS) database for the services sector Both databases are based on member countries self-reported information. Sources differ across countries (e.g. enterprise surveys, business registers Sectoral level information on output volumes and inputs from: –STAN Structural ANalysis database Mostly based on national accounts

5. 5 …its advantages We have longitudinal information on output (value added and turnover) at current prices and labour inputs for foreign affiliates We can derive implicit deflators for value added and production from STAN. Therefore: We can calculate labour productivity growth for the national average, for foreign affiliates and, for domestic firms in the manufacturing sectors for 12 OECD countries and in the service sector for 9 OECD countries.

6. 6..and its limitations AFA/FATS changes/differences in: –definition of a foreign controlled firm (direct/indirect & minority/majority only) –sampling frame/coverage of surveys in reporting countries Level of Consolidation –AFA/FATS data are generally based on enterprise level information –STAN is generally based on establishment level information Differences in variable definition –AFA/FATS employees. STAN: employment –AFA/FATS turnover. STAN: production Deflation –AFA and FATS surveys only contain nominal values: we use the same (STAN) deflators for foreign and domestic.

7. 7 The presence of foreign affiliates (Employment share percentage points)

8. 8 The productivity of foreign affiliates (national average=100)

9. 9 Calculating the contribution of foreign affiliates Total annualised labour productivity growth weighted sum of domestic firms productivity growth and foreign affiliates productivity growth in each period the weights used are the shares of domestic and foreign affiliates in total employment The contribution to labour productivity growth of foreign affiliates as:

10. 10 Labour Productivity growth and contribution of foreign affiliates 1995-2001 (percentage points) Manufacturing Services

11. 11 …and the within and between effects The contribution of foreign affiliates to LP growth The contribution derives from labour productivity growth within the group of foreign affiliates, the within effect and from switches in labour resources between domestic and more productive foreign affiliates, the between effect

12. 12 between Break-down of the contribution of foreign affiliates: within and between effect 1995-2001 (percentage points) Manufacturing Services

13. 13 Conclusions and future work The presence of foreign affiliates has been increasing in OECD countries Foreign affiliates are on average more productive than the national average Foreign affiliates contribute to productivity growth both through –Between effect. (on average larger) –Within effect (mainly in more high tech sectors) OECD uses the data to analyse the determinants of foreign affiliates entry (e.g. effects of regulation) Outward data Work on offshoring using microlevel data

14. 14 Analysis of a particular sector

15. 15 Relative labour productivity of foreign affiliates

16. 16 LP growth ad foreign contribution

17. 17 Break-down of the contribution of foreign affiliates