Do Foreign Firms Bring Greater Total Factor Productivity to Japan?

Abstract

ABSTRACT In recent years, deregulation and a boom in global merger and acquisition activity has significantly increased inward foreign direct investment in Japan, although the level remains lower than in other developed countries. Using micro data on Japanese manufacturing firms, this article investigates whether foreign-owned firms are more productive than domestically owned firms. The article also addresses the question of whether firms targeted in mergers and acquisitions improve their business efficiency after the transaction has taken place. Results show that foreign-owned firms have 10% higher total factor productivity, a higher R&D intensity and higher growth rates of tangible assets and wages. They also show that, after a merger or acquisition, out–in targeted firms increase their productivity and sales whereas in–in targeted firms and other independent firms fail to do so. These results offer policy recommendations that Japan should create conditions to further increase inward foreign direct investment and to improve productivity through mergers and acquisitions by foreign firms.