Persistence in the benefits of foreign ownership: Evidence from divestment

Abstract

In this paper, we examine the persistence of benefits from foreign ownership, which informs the proper FDI policies. We exploit the divestment of foreign affiliates in South Korea from 2007 to 2019 as a quasi‐experiment to estimate such persistence of benefits. Our empirical analysis at firm‐level based on the propensity score reweighted difference‐in‐differences model leads to several conclusions. First, on average, the productivity benefit from foreign ownership does not persist after the divestment. Second, the productivity benefit of foreign ownership is persistent in firms with a higher absorptive capacity, measured by R&D intensity, intangible assets, and skilled workers. Such persistence is strengthened if the former foreign affiliate has a longer duration of ownership before the divestment. It suggests that absorptive capacity and time input are helpful for foreign affiliates to persistently absorb knowledge from their owners. Finally, we find that the productivity benefits of foreign ownership are less persistent at former foreign affiliates relying more on external trade.