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Abstract
Does foreign ownership improve corporate performance, or do foreign firms merely select more productive targets for takeover? Do workers benefit from foreign acquisitions? We answer these questions by comparing the before/after change in several performance indicators of Czech firms subject to foreign takeover after 1997, i.e., after the initial waves of privatization were completed, with the corresponding performance change of matched companies that remained domestically owned until 2005. We find that the impact of foreign investors on domestic acquisitions is significantly positive only in non-exporting manufacturing industries or those with low import penetration, while it is small in both services and manufacturing industries competing on international markets.
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1. Introduction
Foreign direct investment (FDI) is likely to be one of the key channels of economic development for middle-income countries, particularly so for the postcommunist economies of Central Europe (e.g., Alfaro et al., 2004; Neuhaus, 2006). Foreign-owned companies, a group that includes both greenfields and foreign acquisitions, are consistently more productive than domestically owned firms, as Sabirianova et al. (2005) demonstrate for the Czech Republic and Russia.1 Taking the productivity advantage of FDI as a given, a large literature therefore studies its indirect impacts on domestic companies-productivity spillovers within and across industries (e.g., Javorcik, 2004; Gorodnichenko et al., 2007). However, there is somewhat less work available measuring the direct causal productivity effects of foreign takeovers of domestic companies, even though such measurements are important for evaluating the benefits of greenfield vs. brownfield FDI support and for understanding the nature of FDI flows.
There is, of course, a large literature studying the effects of early-transition privatization of state-owned companies in post-communist economies. In one of the most complete analyses, Brown et al. (2006) suggest that privatizing state-owned companies to foreign entities during the 1990s generated larger productivity gains than privatization to domestic owners. In several transition economies, however, large FDI inflows started only after the mass privatization programs were completed. The Czech Republic is a case in point, as it received a massive inflow of foreign capital only after 1997.2
In this paper, we therefore provide evidence on the recent direct effects of FDI. We assess the effects of over 300 cases of foreign takeovers observed in a sample of Czech...