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Strategy Seminar

Monday January 13, 2014


4:15PM - 5:45PM



YUNOK CHO, Stern School of Business - New York University


The Liability of Foreignness, R&D, and Productivity Growth

Multinational corporations are faced with additional cost when operating abroad, called the liability of foreignness. In this paper, I explore the dynamics of the liability of foreignness by comparing the performance of a firm's domestic operations to its foreign operations over time. Using the matched sample, I find that foreign operations start off at a lower productivity level but enjoy higher productivity growth, thus narrowing the performance gap with respect to domestic operations. I next present a theoretical framework where productivity growth operates through two different channels: learning-by-doing and R&D investment. First, learning of foreign plants is likely to take place at a slower rate due to lack of knowledge in a host country, however, they come to better leverage their production experience. Second, foreign plants tend to delay their investment in R&D given greater uncertainty in the host country, resulting in a more gradual investment path. My empirical productivity and R&D regressions are consistent with the theoretical framework. I estimate that, at age 1, foreign plants produce 28% less than their domestic counterpart, whereas at age 6 that gap is only 5%. Moreover, at age 1, foreign plants are 10% less likely to engage in R&D. Finally, by means of simulation the estimated model also allows me to evaluate the relative importance of the two productivity growth channels. I estimate that, at age 2, about 12% of the productivity gap is due to different R&D investment patterns.

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Barbara Baxter

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