How Domestic and Foreign Firms Differ and Why Does it Matter?

This paper reviews andsummarises the results of selectedstud ies on performance gaps between multinational enterprises andtheir domestic counterparts. Performance gaps arise in such fields as productivity, technology, profitability, wages, skills andgrowth. While these gaps are often attributed to foreign ownership of the affiliates, the theory of the Multinational Enterprise argues that these gaps are due to being a Multinational rather than the nationality of the firm. Empirical evidence on the existence of performance gaps between foreign andd omestic firms is supportive of this view: foreign ownership turns out to be a much less important explanatory factor than normally assumed. Firm-specific assets andfirm characteristics like industry, size, parent country andmultinationality per se are more important. Such results are broadly consistent with those derived in the literatures on ownership change, on foreign entry and on spillovers. We conclude that there is little case for foreign direct investment promotion policies to discriminate between firms on the basis of ownership.