Does the digital sector affiliation matter for the productivity of multinational firms?

Abstract

We explore the extent to which multinational performance is determined by subsidiary productivity and their digital sector affiliations. Drawing on more than 6000 multinational parent companies and their over 17,000 foreign subsidiaries in 61 countries, we find that the effect of foreign subsidiary productivity on multinational performance is highest when parent and subsidiary firms are in the digital sector. The effect is weakened when the parent company is in the digital sector but the subsidiary is not, and vice-versa. This suggests that the relatedness between the parent and subsidiary firms in terms of their digital sector affiliations is important for the productivity effect. In addition, the productivity effect is more pronounced even during times of uncertainty, such as the recent global pandemic, suggesting a greater connectedness due to globalisation. We show that multinational parents are able to mitigate the adverse effect of high wage cost through the performance of subsidiaries.