Foreign ownership may be good for you, if you are a firm that is

Foreign ownership of firms is one of those topics which, for reasons I have yet to workout, generates much heat and little light. There are those who just seem to oppose it for reasons that have little to do with the economics of the situation. A working paper by Francisco Pérez-González, of the Stanford business school, looks at "The Impact of Acquiring Control on Productivity". The abstract reads,

Empirical studies on the importance of control rights on efficiency are hindered by actual –presumably efficient– ownership patterns. Finding settings where the right owner does not own the right asset and where ownership arbitrarily changes is challenging. In this paper I aim at overcoming these problems by investigating the elimination of foreign majority ownership restrictions in Mexico. Specifically, I study the performance of affiliates of multinational corporations for which (1) ownership restrictions appeared to bind before they were lifted, and (2) parent ownership increased from minority to majority as the reform was implemented. Using detailed plant-level information, I find that multinational control leads to large improvements in total factor productivity, particularly in industries that rely on technological innovations from their parent companies. Control is also associated with higher investment –particularly in technology intensive forms of production–, and with an improvement in the skill profile of the labor force. Overall, I interpret the evidence as supportive of the property rights theory of the firm.

The conclusion says, in part

In this paper I study the impact of acquiring majority ownership on the performance of Mexican affiliates of multinational corporations (MNCs.) I use the elimination in foreign majority ownership restrictions as a plausible source of exogenous variation.

I find that the allocation of control does affect production decisions and production efficiency. The results show that ownership restrictions to foreign ownership harmed the production efficiency of affiliates of multinational corporations. Upon liberalization, a large fraction of minority owned affiliates became majority or wholly-owned by their parent companies. Plants for which foreign ownership translated into majority or full ownership experienced economically and statistically large productivity gains. Overall, the analysis shows strong evidence that the choice of organizational form affects productivity, particularly in technology intensive industries.

The evidence suggests that government policies directed to attract technological transfers should recognize the importance of residual control rights, particularly in countries with weak legal enforcement. Governments often limit foreign ownership to promote local interests or to prevent expropriation by multinationals. While domestic majority rules do shift the balance in favor of local partners, the impact on overall welfare is uncertain. Fear from expropriation by local partners deters foreign investors from sharing their technologies or making country specific investments, which does hurt economic performance.

In short what Pérez-González finds is that a movement to majority foreign ownership, via increased control by a foreign multinational, leads to large improvements in total factor productivity and to higher levels of investment .

For the geeks out there, Pérez-González interprets this evidence as supportive of the property rights theory of the firm as developed by Grossman and Hart (1986) and Hart and Moore (1990).