Origin of Foreign Direct Investment and Firm Performance: Evidence from Foreign Acquisitions of Chinese Domestic Firms

Abstract

AbstractUsing a newly created panel of domestic Chinese firms who receive foreign direct investment (FDI), this paper finds that Organisation of Economic Cooperation and Development (OECD)‐acquired firms outperform those acquired by investors from Hong Kong, Macao and Taiwan (HMT). To control for possible endogeneity of the FDI decision, I employ propensity score matching combined with a difference‐in‐differences approach. The results indicate that relative to HMT‐acquired firms, OECD‐acquired firms experience significantly higher productivity in the initial year of acquisition and this productivity differential persists in subsequent years, reaching 27.8 per cent by the third year. Further, OECD‐acquired firms exhibit higher profits, average wages and capital per worker compared to HMT‐acquired firms. These results suggest that the origin of the foreign investor differentially affects target firm performance.