Foreign acquisition and divestiture in low and middle income countries

For low and middle income countries, foreign direct investment (FDI) from multinational enterprises (MNE) is seen as bringing many benefits. In order to overcome domestic firms’ inherent advantages in their home markets, MNEs need to have advanced technology, managerial practices and other knowledge capital which could spill over to domestic firms in various ways. A large literature examines foreign ownership’s effects on productivity, wages, export status and other characteristics. Foreign affiliates’ superior performance rests on the notion that only the most productive firms are able to spend the fixed cost of undertaking FDI. This paper analyzes foreign acquisitions as well as divestitures in relation to firm productivity, export status and the likelihood of sourcing foreign intermediate inputs. The literature has rarely addressed both types of ownership changes in the same study. Does a foreign takeover result in higher productivity or are foreign firms cherry-picking the most productive domestic firms? What happens when foreign owners sell to domestic persons? Does productivity drop or does the superiority of foreign ownership persist? Or do some ventures not succeed, which would result in low-productivity firms being divested? This paper uses panel data from the World Bank’s Enterprise Surveys to look at the characteristics of firms before and after ownership changes across 60 countries, all low or middle income, spanning Latin America, Africa, Asia and most transition countries in Eastern Europe and the former Soviet Union. There is little evidence that foreign firms cherry-pick high productivity local ones and productivity improvements following acquisition are large. These firms also become more likely to export and source intermediate inputs from abroad. Firms that are subsequently divested look much more like domestic firms that experience no ownership change than other foreign firms that remain in foreign hands, although there is some indication of performance improvements after divestiture. The findings paint a largely positive picture of foreign involvement in developing and transition countries as they also confirm that continuously foreign-owned firms perform better than domestic firms.