Abstract
We highlight the difference between the service sector and the manufacturing sector in regard to the determinants for a firm to start foreign direct investment (FDI) and the resulting productivity growth. This paper analyzes two questions: (1) whether a certain level of initial productivity explains a firm's choice and (2) how the productivity of such a multinational firm changes over time after FDI. Using the longitudinal panel data on Japanese firms from 1980 to 2005, we trace firm-level decisions over decades. We find that the total factor productivity (TFP) does not explain a firm's choice for starting FDI in manufacturing, but it does in service sector. In contrast, the size and the profitability of firms motivate their FDI in the manufacturing sector, but these do not matter in the service sector. In addition, after FDI, we observe 1.3% annual growth rates of TFP in service, whereas firms in manufacturing show only 0.9% growth rates. To eliminate the selection bias, each multinational firm is paired with domestic firm(s) with similar ex-ante characteristics in the same industry.
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