Abstract
This paper studies the direct effect of foreign investment on target firm operating performance and growth. Foreign-invested firms grow in size but not in productivity compared with non-invested firms over a four-year horizon. Decomposing foreign investment into foreign direct investment and foreign institutional investment reveals that the results are attributable to institutional investment. The effect is attenuated under weak corporate governance conditions, with foreign investment in business group firms resulting in little effect on productivity or growth but leading to growth in stand-alone firms. Foreign-invested firms in industries dependent on external financing experience superior growth, suggesting that foreign investment relaxes credit constraints.
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