Thursday, 5 July 2012

Foreigners may just be good for your economy

Just don't tell Winston Peters! A new paper in the Journal of Economics and Management Strategy looks at Firm Productivity and the Foreign-Market Entry Decision. The abstract reads:
We use Japanese firm-level data to examine how a firm’s productivity affects its foreign-market entry strategy. The firm faces a choice between exporting and foreign direct investment (FDI). In the case of FDI, the firm has two options: greenfield investment or acquisition of an existing plant (M&A). If it selects greenfield investment, it has two ownership choices: whole ownership or a joint venture with a local company. Controlling for industry- and country-specific characteristics, we find that the more productive a firm is, the more likely it is to choose FDI rather than exporting and greenfield investment rather than M&A.
If these results hold for firms setting up in New Zealand they look like good news for New Zealand. If we see FDI, and in particular in areas of greenfields investment, in New Zealand then this tips the probability that the investing firm is a high productivity firm. But these are exactly the type of firms we want setting up shop in New Zealand. Given they are high productivity firms they will bring with them the industry best management, manufacturing and organisational practices which can flow onto New Zealand firms. Also given their productivity these firms will provide the most competition for local firms forcing the locals to lift their game and benefiting local consumers.

Of course if we make investment in New Zealand harder for foreign firms then this research suggests we could be loosing the benefits of having the best firms in our markets.

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