Benefits of Foreign Ownership: Evidence from Foreign Direct Investment in China

Abstract

To examine the effect of foreign direct investment, this paper compares the post-acquisition performance changes of foreign- and domestic-acquired firms in China. Unlike previous studies, we investigate the purified effect of foreign ownership by using domestic-acquired firms as the control group. After controlling for the acquisition effect that also exists in domestic acquisitions, we find no evidence in the data that foreign ownership can bring productivity gains to target firms. In contrast, a strong and robust finding is that foreign ownership significantly improves target firms' financial conditions and exports relative to domestic-acquired firms. Foreign acquisition is also found to improve output, employment and wage for target firms. These findings highlight the financial channel through which FDI benefits income and economic growth of host countries.