Multinationals and Domestic TFP : Market Shares, Agglomerations Gains and Foreign Ownership

We explore the role of Multinational Enterprises (MNEs) on Total Factor Productivity (TFP) of domestic firms by drawing attention to the foreign ownership structure. First, we differentiate between market share (MS) due to competition effects and knowledge agglomeration gains (AG). The former induces market pressure, due to foreign presence, and makes domestic firms charge lower price mark-ups. Second, we investigate whether intra-industry (horizontal) and inter-industry (vertical) spillovers vary with the degree of foreign control. Using a sample of manufacturing firms from six European countries, we find that a higher presence of MNEs in the domestic market makes domestic firms charge lower mark-ups. Only Majority and wholly-owned MNEs generate statistically significant horizontal spillovers. The economic size of these spillovers is low. We also detect backward spillovers from MNEs in downstream industries. However, forward spillovers from MNEs in upstream industries are negative. When we control for absorptive capacity, direct linkages with MNEs, scope of product differentiation and geographical proximity, the economic size of AG increases substantially