The World Economy

The World Economy (2013)

doi: 10.1111/twec.12068

Home Firm Performance After Foreign

Investments and Divestitures
Dirk Engel1,2 and Vivien Procher2,3
1

University of Applied Sciences Stralsund, Stralsund, 2Rheinisch-Westf

alisches Institut f
ur
Wirtschaftsforschung (RWI), Essen, and 3Jackst
adt Center of Entrepreneurship and Innovation Research,
Schumpeter School of Business and Economics, University of Wuppertal, Wuppertal

1. INTRODUCTION

XPORTING and foreign direct investment (FDI) can be seen as alternative strategies to
serve foreign markets, and thus, switching from export to FDI might reduce home-based
export activities. Consequently, policymakers worry that FDIs imply a significant relocation
of jobs from home to host countries. However, existing papers do not provide substantial
empirical confirmation for any negative effects of FDI on home employment (e.g. Barba
Navaretti and Castellani, 2008; Becker and Muendler, 2008; Desai et al., 2009). Therefore,
this paper investigates the extent to which the FDI export relationship can illuminate this
trend. Among others Head and Ries (2004) argue that the location of different stages of production in different countries (i.e. vertical specialisation) and home centralisation of certain
products may matter for firms which in turn would point towards a positive association
between FDI and exporting.
Based on a large database for French firms and applying propensity score matching combined with a difference-in-difference (DiD) estimator, we show that FDI and exporting often
constitute complementary activities. To the authors knowledge, there is no study that analyses the FDI export relationship and the relationship between FDI and domestic employment
simultaneously. While this relationship is not homogeneous across firms, any study should
address the important role of moderating factors like industry affiliation. We provide some
empirical evidence by differentiating between firms in high-tech and low-tech industries. The
imitation of knowledge-intensive products might have great consequences for the comparative
advantage of firms in high-tech industries, so that the latter might be more inclined to opt for
vertical specialisation and home centralisation of production processes. In contrast, firms in
low-tech industries might prefer to substantially replicate and relocate production process to
low-cost countries. As a result, we expect export activity of firms in high-tech industries are
affected to a larger extent by the FDI decision than firms in low-tech industries.
While many empirical studies analyse the role of investments and acquisitions on home
plant performance, we fail to detect any study which addresses the effects of divesting from
abroad on home firm employment, turnover and export activity. The meta-analysis of Lee and
Madhavan (2010) clearly confirms this research gap. Existing papers focus either on financial
accounting measures (e.g. return on investment) or stock price changes due to foreign divestitures announcements. Driven by the globalisation of production processes, divestitures have
We would like to thank the anonymous referee who gave precise and helpful comments on an earlier
version sent to The World Economy. Furthermore, we appreciated the comments and suggestions made
by Christoph M. Schmidt. The financial support by the Ruhr Graduate School in Economics is gratefully
acknowledged.

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become increasingly relevant in the last few decades. Moreover, business restructuring due to
the financial and economic crisis since 2008 will further raise the likelihood of divestitures in
the years to come. By analysing both the effects of investing abroad and divesting from
abroad, we finally provide a comprehensive analysis on the home performance of firms after
stepping in and out of foreign markets.
The remainder of the paper is organised as follows: Section 2 contains a brief review of
the FDI and divestiture literature with respect to firm performance. Section 3 describes the
data and methodological approach. Results are presented in Section 4. Section 5 presents the
conclusions drawn.
2. BACKGROUND

a. Effects of Investing Abroad

The debate of home market effects from FDI is often linked to the actual type of FDI.
Resource-seeking FDI might affect home plant output and employment negatively and productivity positively in the short term, as some production processes are relocated to exploit
cost advantages at the foreign location. In the long term, however, positive effects on output
and employment based on reducing the cost of production may dominate which then allows
product prices to decrease and, thus, could induce higher demand at home. Furthermore,
extensive intra-firm trade between headquarters and foreign affiliates might curtail negative
effects of (partial) relocation when the firm prefers to concentrate some production stages
abroad (see Head and Ries, 2004).
Market-driven FDI with self-contained foreign production units might substitute some
home-based export activities so that domestic employment decreases. However, multinational
enterprises (MNEs) who concentrate on market-driven FDI are likely to exploit economies of
scale by accessing new markets, which in turn may have positive effects on the productivity
at home. Similarly, firms also experience performance gains through their exposure in foreign
markets (see the learning-by-exporting hypothesis e.g. Bernard and Jensen, 1999; Wagner,
2007; meta-analysis by Martins and Yang, 2009).
Recent empirical studies analyses intensively the effects of investing abroad on home
plants performance. Based on the extensive use of propensity score matching combined with
a DiD approach in the microeconometric programme evaluation (Heckman et al., 1998), this
kind of estimator has also received increasing attention in the FDI literature. Barba Navaretti
and Castellani (2008) apply this estimator and find significant positive effects of outward FDI
by Italian MNEs on turnover and productivity (TFP) at home, but the effect on employment
is insignificant. Based on a small sample of 47 German MNEs, Kleinert and Toubal (2007)
also observe an insignificant effect on employment and a significant increase in TFP in the
first year after investing abroad. Jackle and Wamser (2010) use the same database and apply
Heckmans (1978) parametric estimator for endogenous treatment effects. They find significant positive effects of FDI on TFP for German MNEs up to three years after going abroad.1
For Japanese MNEs, Hijzen et al. (2007) observed a weak significant positive effect on
domestic factory TFP in the initial year and significant positive effects on output and employ-

Interestingly the OLS estimates are downward biased in this study which suggests that no significant
differences in TFP growth and employment growth exist.

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D. ENGEL AND V. PROCHER

ment in the following three years. The study of Becker and Muendler (2008) combines
German factorial level data with data about foreign affiliates to estimate the effect of employment expansion in foreign affiliates on domestic employment. The authors discover that the
probability of domestic worker separation is significantly reduced. In fact, the fear of policymakers that outward FDI relocates jobs from home to target countries is hardly supported in
any corresponding empirical studies.
A handful of papers consider host-country characteristics to estimate the effects of investing
abroad for resource- and market-driven FDI. Head and Ries (2003) look at the host countries
chosen by firms for their investments and classify them into low- and high-wage countries. The
authors argue that firms with investment in low-wage countries only follow resource-driven FDI
motives, whereas companies with investments in a wider range of low- and high-wage countries
follow a more horizontal pattern of FDI. Barba Navaretti et al. (2010) adopt the basic idea to
analyse the impact on TFP, turnover and employment at home for Italian and French MNEs.
Interestingly, the findings do not differ remarkably for outward investments in low-wage and
high-wage countries. TFP growth is significantly positive in Italy, whereas FDI of French firms
does not matter for TFP growth at home. Employment is neither significantly negative in France
nor in Italy. Similarly, Becker and Muendler (2008) do not detect any remarkable differences
across several host-country locations. In sum, there is hardly any evidence of a negative effect
of outward investments on home performance, in particular on home employment.
Many other papers explicitly address the relationship between FDI and exports. Standard
theory would predict that exporting and FDI are substitutes even if firms relocate or duplicate
home production to a foreign country without any kind of intra-firm trade. Head and Ries
(2004) argue that complementarity between FDI and export occurs when investing abroad is
linked with (i) vertical specialisation (exports of intermediate goods between the parent company and its foreign affiliates) and/or (ii) home centralisation of one product and foreign centralisation of another product. Here, home centralisation for firms becoming engaged in FDI
implies that they simultaneously increase the domestic production for products destined for
export markets. A further argument for complementarity can be derived from Krautheim
(2009). He introduces the term export-supporting FDI which means that firms found retail
affiliates to sell products produced at home in a foreign market. In a recent study, Hering
et al. (2010) consider affiliate characteristics, to better distinguish between horizontal and vertical FDI for Japanese MNEs. Affiliates with a high level of local purchases and high sales
back to Japan are defined as vertical FDI implying a high level of vertical specialisation. In
line with standard theoretical predictions of the proximity-concentration trade-off, the
authors observe that horizontal FDI substitutes exports from MNEs home country. In contrast, imports increase for MNEs with vertical FDI. The study further reveals that labour productivity in Japanese parent companies increases when Japanese MNEs either start horizontal
FDI in high-income countries or vertical FDI in low-income countries. Nevertheless, a comprehensive study across all business sectors that simultaneously analyses the FDI export
and the FDI home performance relationship is still non-existent.
We further expect that the extent of complementarity between FDI and export differs with
respect to firms strategy of home centralisation, based on their technological advantage. In
general, products of firms in high-tech industries are based on remarkable achievements in
R&D, in an attempt to create a sustainable technological advantage. Faced by the risk of
product imitation, firms may opt for home centralisation of high-tech products and vertical
specialisation to reduce this risk. Therefore, one might assume that firms in high-tech industries are more inclined to opt for home centralisation and vertical specialisation than firms in
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low-tech industries. Recent empirical findings of Amador and Cabral (2009) support this
assumption. The authors show that vertical specialisation activities are more pronounced in
high-tech than low-tech industries. The empirical study of Stiebale (2010) also strengthens
this prediction. Applying an empirical framework that accounts for unobserved firm heterogeneity and the possible endogeneity of cross-border acquisitions, he shows that R&D activity
of acquirers in high-tech industries was intensified after an outward merger or acquisition,
compared with acquirers in low-tech industries.
b. Effects of Divesting from Abroad
While the literature intensively discusses the effects of investing abroad, there are not
many studies in the economics literature, which analyse the effects of foreign divestitures on
the home performance of enterprises. Foreign divestitures are characterised by a shut down or
selling assets of foreign operations (e.g. Benito, 1997). Following Hanson and Song (2003)
and Mathur et al. (2006), four main reasons for divesting are proposed: (i) eliminating negative synergies; (ii) raising cash to fund other investments; (iii) agency problems and (iv) a
positive difference between acquirers willingness to pay for the asset and its valuation by the
seller. With respect to foreign operations, negative synergies mainly arise when a foreign subsidiary underperforms and resources have to be shifted from the mother company to the foreign subsidiary. Agency problems are mainly driven by managerial discretion. Insufficient
monitoring mechanisms as well as managerial incentive schemes to promote growth instead
of profitability, imply that managers tend to waste free cash flow for less profitable projects to
realise their own non-value maximising objectives (Jensen, 1986).
The empirical literature on the effects of divestitures either focus on accounting measures
like return on assets or market-based measures like cumulative abnormal returns (see Lee and
Madhavan, 2010 for details). With respect to the latter stock price changes prior to and after
the announcement of divestiture are analysed (see Cao et al., 2008 for a recent study). Given
that divestitures reduce negative synergies as well as agency costs, the headquarters has the
potential to increase its cash position. Hanson and Song (2003) empirically confirmed this
prediction. Divesting firms have significant lower returns on assets than matched control firms
in the two years before divestiture, but significant higher returns in the second and third year
after divestiture. Denis and Shome (2005) analysed 130 large asset downsizings between 1985
and 1994, and found that downsized firms achieve on average an 7.9 per cent increase in the
mean of operating income divided by book value of assets within three years after
downsizing.
The effects on employment and productivity might differ from effects on accounting measures. First, foreign divestitures can offer growth opportunities at headquarters when production is shifted back home and foreign markets of previously divested foreign affiliates are
partly served from domestic factories. Based on 664 foreign divestiture announcements,
Mathur et al. (2006) did not find a significant reduction in foreign sales related to total sales,
between two years after and one year before announcements for firms with foreign divestitures, in comparison with control firms without foreign divestitures. This finding supports the
view that these firms did not exit foreign markets completely.
Positive employment effects may also occur due to reduced negative synergies, debt overhang and agency problems. Mathur et al. (2006) noted that capital expenditures divided by
total assets are slightly higher for firms with foreign divestitures than for control firms. Thus,
domestic employment might increase after foreign divestitures. An empirical analysis can
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D. ENGEL AND V. PROCHER

provide a more comprehensive understanding of average employment effects after foreign

divestitures.
3. DATA AND EMPIRICAL METHOD

a. Panel Structure
This paper utilises firm-level data from the European AMADEUS database which is
provided by Bureau van Dijk (BvD). The data collection by BvD is carried out by country-specific information providers, for example the credit insurer Coface Scrl in France.
These providers use published sources including annual reports and stock exchange information. In addition, they contact companies directly to handle collection orders from companies business partners (e.g. banks). The coverage ratio of AMADEUS data is 73.5 per
cent related to total sales of Sirene register which covers all French companies (see
INSEE, 2012).
Companies financial records are available for up to 10 years but information on the ownership and subsidiary structure is static and based on the latest annual report available in the
year of data compilation. Dynamics in the (foreign) subsidiary network can only be analysed
via the various updates of the AMADEUS database. We have access to six updates and focus
on changes in the international status of companies that take place between the years 2000
and 2002, 2002 and 2004, as well as 2005 and 2007, respectively. Consequently, we analyse
the post-entry and post-exit domestic performance of French exporters and MNEs that changed their status in 2001, 2003 or 2006.
Our data set is limited to unconsolidated firm-level accounts to analyse location- and
entity-specific performance effects. The data set includes companies of a wide range of
manufacturing and service industries.2 Table 1 provides an overview of the underlying
panel structure. The overall panel is unbalanced as the latest year for which key financial
data are available is 2010. Given the underlying data structure, the short-term analysis
(t + 1 and t + 2) is based on a larger sample of firms than the long-term analysis (t + 5
and t + 6).
We differentiate between two types of changers with exporting firms that become engaged
in FDI (i.e. new MNEs, DX-DI) and MNEs that divest all foreign affiliates to become pure
exporters (DI-DX). The number of observations, as depicted in Table 2, is obtained via probit
estimations with variables taken from the pre-change periods. In sum, the number of exporters
going abroad is much larger (884) than the number of MNEs that cease their foreign operations (279). In the majority of cases, a large pool of potential control firms (non-changers)
exists, which is a prerequisite for finding a comparable firm for each treated observation in
the subsequent matching procedure.
The number of firms used in the matching procedure and DiD analysis can be further
reduced if key performance variables are missing in the post-change period. Consequently,
the number of observations depends on the type of change, the year of change and the specific
2

Excluded from the analysis are the following industries (with the industry codes (NACE) in parentheses): Agriculture, hunting and forestry (01, 02), fishing (05), mining and quarrying (1014), management
activities of holding companies (7,415), public administration and defence, compulsory social security
(75) and activities of membership organisations (91). Values in the upper and lower 1st percentile of the
distribution are eliminated from the dataset in order to control for outliers and coding errors.
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TABLE 1
Panel Structure
Pre-change

Change

Post-change

t
2

t
1

t+1

t+2

t+3

t+4

t+5

t+6

1999
2001
2004

2000
2002
2005

2001
2003
2006

2002
2004
2007

2003
2005
2008

2004
2006
2009

2005
2007
2010

2006
2008

2007
2009

TABLE 2
Number of Observations
Pre-change Year (t
1)
Foreign investment (FDI)
DX-DI
Treated
DX
Control
D-DI
Treated
D
Control
Foreign divestment
DI-DX
Treated
DI
Control
DI-D
Treated
DI
Control

2000

2002

2005

Total

792
25,930
273
79,807

292
28,745
115
100,977

335
34,746
160
153,094

1,419
89,421
548
333,878

136
324
96
350

204
1,189
96
1,297

106
1,465
66
1,191

446
2,978
258
2,838

Notes:
(i) Changes in the internationalisation status can occur between 2000 and 2002, 2002 and 2004, 2005 and 2007, where
the first year refers to the pre-change period (t
1). For example, firms in the DX-DI group with the pre-change year
2000 were exporters (DX) in 2000 who became multinational enterprises (DI) by 2004. (ii) The number of observations is obtained from probit models on pre-change variables. (iii) The control groups refer to the potential number of
firms that can function as control observations in the matching procedure. (iv) Total refers to firm-year observations.

outcome variable.3 Therefore, the final sample size is reported with the results for the DiD
analysis in Tables 36 in Section 4.
b. Empirical Method
Given a firm changes its mode of internationalisation, we cannot observe the outcome of
the hypothetical situation of not changing, and thus, we are not able to calculate the economic
effect of a change in the internationalisation mode directly. Usually, it needs a group of adequate control firms without mode change to run a precise estimation of the outcome for the
counterfactual situation. In this paper, we follow state-of-the-art methodology and combine
3

In principle there are 36 different sample sizes due to two changing modes (upward D/DX-DI and
downward DI-DX/D), three changing years (2001, 2003 and 2006) and six outcome variables (export
turnover, export share, number of employees, operating turnover, labour productivity and TFP). Values
in the upper and lower 1st percentile of the distribution are eliminated from the dataset in order to control for outliers and coding errors.

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D. ENGEL AND V. PROCHER

the propensity score matching to construct the sample of adequate control firms with the DiD
estimator (e.g. Heckman et al., 1998, 1999; Blundell and Costa Dias, 2000, 2002) to estimate
the average treatment effect on the treated (ATT).
As the number of observables used in the matching process increases, it becomes rather
difficult to find a suitable match for every firm; furthermore, every unmatched firm is tantamount to data loss. The propensity score method suggested by the pioneer work of Rosenbaum and Rubin (1983) constitutes a helpful solution by computing the probability of mode
change conditional on observables by applying a logit or probit estimation. We implement a
nearest neighbour matching with replacement to match each treated firm with one non-treated
firm with the closest probability of mode change.4 This procedure implies that a non-treated
firm can be matched to more than one treated firm. Therefore, a correction for standard errors
to draw conclusions on statistical inference is required. We follow Lechner (2001) and apply
his estimator for an asymptotic approximation of the standard errors.
When the matching method is completed, we can then apply DiD estimator to calculate
the ATT as follows:
1
1
0
0
ATTDiD EYi;tk

Yi;t
1

EYi;tk

Yi;t
1
:
1
1

Yi;t
1
 of treated firms
The DiD estimator evaluates the average performance EYi;tk
between the year before (t
1) and k years after a mode change against the average perfor0
0
mance EYi;tk

Yi;t
1
 for matched non-treated firms.

c. Outcome and Control Variables

All firm-specific state variables used in the probit model to explain changes in the mode of
internationalisation are taken from the pre-change period, t
1. Many theoretical and empirical
papers (e.g. Roberts and Tybout, 1997; Helpman et al., 2004) emphasise the important role of
basic firm characteristics like the number of employees, operating revenue, age and productivity for bearing the sunk costs of investing abroad. We further include previous export turnover
and export share (export to total operating turnover), which might approximate international
experience and attractiveness of foreign markets. The productivity measures used in the probit
models refer to labour productivity, defined as operating revenue per employee. All these
quantitative variables are included as values in logarithm.5
A growing number of studies point out that multiunit and multinational characteristics as
well as ownership characteristics can also affect firms mode of internationalisation (e.g.
Roper et al., 2006; Bernard and Jensen, 2007; Greenaway et al., 2007). Therefore, firms
ownership structure is used as a proxy for underlying strategic interests of its owners and is
captured by the dummy variables corporate shareholder, financial shareholder, state shareholder, individual shareholder and foreign shareholder for non-French investors. Only owners
with an ownership share of 10 per cent or more are taken into account to assure an effective

The matching procedure is carried out using software package psmatch2 in STATA 12 (see Leuven
and Sianesi, 2003).
5
In previous estimations we also took into account the growth rate of employees, productivity and
(export) turnover to check for the role of firms growth path. Since we detect no significant coefficient
estimates for growth rates we decided to leave out these variables in the final estimations to prepare our
matched samples.
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voice in the management of a firm. The organisational structure is further accounted for by
the number of domestic subsidiaries.
Financially constrained firms might be less likely to enter (Chaney, 2005) and more likely
to leave foreign markets. Companies can fail to finance their internationalisation because of a
liquidity shortage. Thus, following recent empirical papers on foreign market participation
(Greenaway et al., 2007; Stiebale, 2011), we include a liquidity ratio defined as the difference
of current assets and current liabilities to total assets.
Markusen (1995) highlights the positive correlation between the importance of intangible
assets in industries and the economic importance of MNEs. The ratio of intangible fixed assets to
tangible fixed assets is used as a proxy for the knowledge capital because no direct information is
available on corporate R&D expenses. Finally, up to 28 industry dummies based on the two-digit
NACE classifications attempt to capture any remaining industry-specific heterogeneity.
For evaluating the post-entry as well as post-exit performance, we concentrate on six outcome variables. The main variables of interest are export share (i.e. export to total operating
revenue) and export turnover to analyse the extent to which exports serve as substitutes or
complements of FDI. Additionally, employment, operating revenue, labour productivity and
total factor productivity are taken into account.6 With exception of the export share, we compute and compare growth rates of variables between the treatment and non-treatment group.
The computation of growth rates follows Evans (1987) approach by assuming an exponential
growth trend. Annual average growth rates are calculated as the difference between the logarithm of outcome variables in any year t + k (with k  1) and the pre-switching year t
1,
divided by the number of years between t + k and t
1.
4. RESULTS

Separate probit regressions are carried out for each switching mode and year to obtain
matched samples of treated and suitably non-treated firms. In sum, we fail to detect any
significant differences between both groups of firms before the treated firms change the mode
of internationalisation.7 This in turn allows interpreting differences in outcome variables as
result of switching the mode of internationalisation.
a. Investing Abroad
The results from the DiD estimation for treated firm, which invest abroad for the first time,
are presented in Tables 3 and 4. The number of firm observations decreases over time as
complete outcome records are not available for all post-change periods.8 Our main variables
of interest are export turnover and export share. According to results depicted in Table 3, new
MNEs are affected by a significant increase in the absolute export turnover compared with
domestic firms and exporters that, in the same time frame, did not become engaged in FDI.

TFP is obtained by applying the STATA command (levpet). The TFP value corresponds to the residual
obtained from a firm-specific Cobb-Douglas production function. In contrast to labour productivity, TFP
has no obvious scaling or natural base values thereby impeding a direct interpretation (see Levinsohn
et al., 2003 for details).
7
The results for the probit estimations and balancing tests are available on request.
8
Robustness checks are carried out for firms with a complete outcome record in all post-change
periods.
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D. ENGEL AND V. PROCHER

TABLE 3
The Effect of Becoming Engaged in FDI on Firms Home Performance (D/DX-DI)

Outcome Variable

xt

Export turnover

t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t

Export share

Operating turnover

Employment

Labour productivity

TFP

+ kxt
1

+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6

Treated Firms

Diff-in-diff

t-Values

1,955
1,894
1,859
1,557
1,402
1,389
1,952
1,895
1,859
1,555
1,404
1,389
1,952
1,895
1,859
1,555
1,404
1,389
1,712
1,528
1,537
1,318
1,032
1,232
1,709
1,527
1,534
1,317
1,032
1,232
1,323
1,165
1,187
1,034
833
956

0.4735***
0.5460***
0.6127***
0.8174***
0.7522***
0.8525***
0.0211***
0.0288***
0.0324***
0.0486***
0.0428***
0.0484***
0.0811***
0.0924***
0.1098***
0.1257***
0.1464***
0.1804***
0.0252
0.0460*
0.0584**
0.0508
0.0599
0.0685
0.0415**
0.0258
0.0422*
0.0436
0.0713*
0.1152***

0.0534

0.0624
0.0149
0.0420

0.0082

0.0730

4.780
5.161
5.290
5.802
4.564
4.965
3.701
4.660
4.659
5.595
4.335
4.714
4.206
4.155
3.805
3.235
3.084
3.373
1.391
1.919
2.249
1.456
1.262
1.471
2.160
1.251
1.809
1.428
1.728
2.762
0.240
0.233
0.059
0.138
0.021
0.204

Notes:
(i) Reported are the results for the difference-in-difference estimations with xt + kxt
1, where t = change period and
k takes the values 16. (ii) The t-values are reported and *p < 0.10, **p < 0.05, ***p < 0.01.
(iii) FDI, foreign direct investment.

The export turnover is already 47.4 percentage points higher in the first year after switching
and increases to 85.3 percentage points after six years compared with the year before investing abroad. Since the annual growth rate in operating revenues is much lower, new MNEs
display a higher export share growth in all post-change periods, ranging from 2.1 to 4.8 percentage points. This persistent and accelerating rise is remarkable because treated firms
already display an initial ratio of exports to total sales of around 30 per cent in t
1. Overall,
these findings suggest that exporting and FDI are complements rather than substitutes in international trade, including manufacturing and services sectors. The complementarity even holds
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TABLE 4
Performance of High- and Low-technology Firms (D/DX-DI)
Outcome
Variable

xt

Export
turnover

t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t

Export
share

Operating
turnover

Employment

Labour
productivity

TFP

+ kxt
1

+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6

Treated
Firms: High
Technology

Diff-in-diff

t-Value

Treated
Firms: Low
Technology

Diff-in-diff

t-Value

571
552
538
439
390
392
570
553
538
439
390
392
570
553
538
439
390
392
499
446
450
371
285
349
498
446
449
371
285
349
379
338
346
292
227
268

0.6749***
0.6030***
0.7641***
1.1824***
1.4059***
1.3694***
0.0453***
0.0427***
0.0510***
0.0896***
0.0952***
0.0961***
0.0956***
0.1188***
0.1681***
0.2242***
0.2643***
0.2930***
0.0361
0.0664
0.0130
0.0700
0.0639
0.0543
0.0623**
0.0635*
0.1058***
0.0741
0.0638
0.1998***
2.0443***
2.3176***
2.1302***
2.5029***
3.0165***
3.0113***

3.663
3.205
3.613
4.584
4.577
4.267
4.182
3.759
4.040
5.694
5.449
5.351
3.256
3.277
3.724
3.662
3.414
3.310
1.224
1.610
0.321
1.217
0.914
0.794
2.160
1.796
2.694
1.470
1.090
2.695
5.624
5.362
5.311
5.122
4.435
5.103

1,384
1,342
1,321
1,118
1,012
997
1,382
1,342
1,321
1,116
1,014
997
1,382
1,342
1,321
1,116
1,014
997
1,213
1,082
1,087
947
747
883
1,211
1,081
1,085
946
747
883
944
827
841
742
606
688

0.3904***
0.5226***
0.5508***
0.6737***
0.4999***
0.6489***
0.0112*
0.0231***
0.0247***
0.0325***
0.0225**
0.0296***
0.0752***
0.0815***
0.0860**
0.0869*
0.1009*
0.1361**
0.0206
0.0374
0.0773***
0.0433
0.0584
0.0739
0.0329
0.0102
0.0163
0.0317
0.0742
0.0823*

0.8965***

1.0360***

0.8549***

0.9267***

1.1440***

1.2745***

3.666
4.482
4.385
4.430
2.853
3.569
1.853
3.450
3.286
3.464
2.105
2.649
3.293
3.182
2.565
1.958
1.905
2.293
0.993
1.409
2.584
1.109
1.075
1.377
1.451
0.442
0.622
0.920
1.556
1.832
3.680
3.550
3.062
2.808
2.733
3.319

Notes:
(i) Reported are the results for the difference-in-difference estimations with xt + kxt
1, where t = change period and
k takes the values 16. (ii) The t-values are reported and *p < 0.10, **p < 0.05, ***p < 0.01.

when the sample is limited to exporters that start investing abroad. In this case, export turnover rises by up to 33.7 and 68.4 percentage points in the first and sixth year, respectively.9
The DiD measures show positive signs for employment and turnover growth in the short
and medium term. One reason for strong rise in turnover might be that foreign investments
9

Results are available on request.

2013 John Wiley & Sons Ltd

1488

D. ENGEL AND V. PROCHER

based on cross-border mergers and acquisitions (M&As) increase the opportunity to exploit
economies of scale within the enlarged corporate network (e.g. Roller et al., 2001). Moreover,
turnover growth is always higher than employment growth, and thus, labour productivity also
increases significantly. However, productivity effects are insignificant for the TFP measure.
Our results are generally in line with many recent empirical studies for Europe that find
positive home performance effects of firms investing abroad. In particular, taking a much larger set of firms from major industry and service sectors into account than most other studies,
we confirm findings of Barba Navaretti et al. (2010) for France. In addition, we provide
empirical evidence that output growth of treated firms is mainly driven by their export activity. As a robust check, we restricted our analysis to firms within each cohort (see Table 1)
that exhibit a complete post-change record (till t + 4) in the respective outcome variables.
The results in the restricted and unrestricted samples are similar.10
Examining the moderating role of industry affiliation, Table 4 depicts separate results for
firms in high-technology and in low-technology industries. While we do not have data about
expenditures for research and development, we apply the NIW/ISI list of high-tech industries
in manufacturing (Legler and Frietsch, 2007), and the list of high-tech service industries
suggested by Nerlinger (1998). Exporters in high-tech industries exhibit a stronger growth in
their export turnover and export share than non-treated firms in high-tech industries, whereas
companies in low-tech industries achieve a remarkable lower growth in these measures. For
example, firms in high-tech industries display a significant annual growth rate in the export
share of 4.5 up to 9.6 percentage points in the post-switching periods compared with exporters
that did not become engaged in FDI. In contrast, firms in low-tech industries attain an export
share growth of 1.12.96 percentage points only. The difference might arise due to a stronger
domestic centralisation as well as vertical specialisation of certain products for firms in hightechnology industries. In contrast, firms in low-technology industries opt more often for a simple replication of home production in foreign countries. This notable difference in the investment behaviour might explain why firms in high-technology industries achieve a significant
increase in labour and total factor productivity. Vertical specialisation and/or home centralisation of certain products allow to better exploit economies of scale. In sum, firms in hightechnology industries that become engaged in FDI clearly outperform non-switching firms as
well as switching firms in low-technology industries. Irrespective from any firm and industryspecific differences, the major finding still holds exporting and FDI are complements rather
than substitutes.
b. Foreign Divestitures
It remains an open question whether the complementarity between FDI and exporting is
also displayed in the opposite direction. Table 5 reports the DiD measures for MNEs that
divest all foreign operations to become either pure exporters or domestic firms which only
serve the home market. We find that complete foreign divestitures have no significant effect
on the export activity compared with non-treated MNEs. In fact, two-thirds of divesting firms
are engaged in exporting after the divestiture. These firms display a significant increase in
export activity in the first year after the drawback from abroad.11 In the medium and long

10
11

Results are available on request.

Results are available on request.
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HOME FIRM PERFORMANCE, FDI AND DIVESTITURES

1489

TABLE 5
The Effect of Foreign Divestment on Firms Home Performance (DI-DX/D)
Outcome Variable

xt

Export turnover

t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t

Export share

Operating turnover

Employment

Labour productivity

TFP

+ kxt
1

+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6

Treated Firms

Diff-in-diff

t-Value

665
614
606
523
411
392
665
644
634
522
465
454
663
612
606
520
410
391
602
509
495
465
248
339
600
507
494
462
248
338
450
372
368
339
185
238

0.4963

0.9825

0.3736

0.5092

2.0466

0.4682

0.0260

0.0369

0.0202

0.0174

0.0649

0.0193

0.4083

0.3302

0.3658

0.4953

0.5381

0.6233

0.2366

0.3038

0.2928

0.2937
0.0237

0.3371

0.1424

0.0587

0.1407

0.1779

0.0704

0.1711

0.3521

0.4871

0.5972

0.6364

0.4465

0.8813

0.472
0.478
0.253
0.287
0.582
0.189
0.406
0.391
0.249
0.168
0.382
0.129
0.668
0.441
0.499
0.542
0.436
0.429
0.489
0.481
0.432
0.380
0.032
0.282
0.542
0.113
0.379
0.442
0.116
0.247
0.226
0.245
0.289
0.271
0.100
0.238

Notes:
(i) Reported are the results for the difference-in-difference estimations with xt + kxt
1, where t = change period and
k takes the values 16. (ii) The t-values are reported and significance level is 10%.

term, however, these switching firms do not display a higher export activity than MNEs that
did not change. Obviously, home plants cannot gain from the strategic decision to shut down
foreign affiliates. Krautheim (2009) further argues that divesting might reduce in the long
term the chance to export home-centred products to foreign markets at lower costs.
Export turnover, operating revenue and employment are not significantly affected by
changing the internationalisation mode. Moreover, both productivity measures exhibit negative
coefficients which are, however, not significant at the conventional levels. Thus, a retreat from
international markets is neither linked to performance losses nor gains at home. Robustness
checks for firms with a complete post-change record confirm these results. This finding
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1490

D. ENGEL AND V. PROCHER

TABLE 6
Performance of High- and Low-technology Firms (DI-DX/D)

Outcome
Variable

xt

Export
turnover

t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t

Export
share

Operating
turnover

Employment

Labour
productivity

TFP

+ kxt
1

+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6
1
2
3
4
5
6

Treated
Firms: High
Technology

Diff-in-diff

t-Value

Treated
Firms: Low
Technology

Diff-in-diff

t-Value

206
183
181
154
120
119
204
182
180
153
119
118
204
182
180
153
119
118
194
153
155
138
64
108
192
152
154
137
64
107
140
103
110
94
45
75

0.4879

1.1615

0.1332

0.3846

2.5272

0.8622

0.0186

0.0283
0.0068

0.0142

0.0655

0.0240

0.3193

0.2140

0.2019

0.3758

0.4551

0.6698

0.2565

0.3849

0.3018

0.3372

0.0456

0.4597

0.0862
0.0903

0.0378

0.0936
0.1108

0.1396

0.0653

0.0634

0.2793

0.2751
0.1695

0.5706

0.784
0.802
0.134
0.328
0.999
0.608
0.472
0.434
0.135
0.213
0.564
0.267
0.737
0.376
0.369
0.534
0.473
0.609
0.776
0.836
0.639
0.568
0.075
0.527
0.499
0.226
0.155
0.319
0.244
0.270
0.071
0.050
0.222
0.176
0.063
0.247

459
431
425
369
291
273
459
430
426
367
291
273
459
430
426
367
291
273
408
356
340
327
184
231
408
355
340
325
184
231
310
269
258
245
140
163

0.5001

0.9057

0.4804

0.5622

1.8482

0.2999

0.0293

0.0407

0.0316

0.0188

0.0646

0.0174

0.4479

0.3803

0.4371

0.5452

0.5721

0.6042

0.2272

0.2699

0.2888

0.2755
0.0463

0.2821

0.1690

0.1214

0.1877

0.2133

0.1368

0.1878

0.4819

0.6493

0.7356

0.7756

0.6555

1.0264

0.564
0.565
0.404
0.395
0.682
0.146
0.550
0.544
0.473
0.224
0.484
0.143
0.950
0.680
0.792
0.803
0.627
0.555
0.600
0.561
0.548
0.479
0.084
0.309
0.800
0.316
0.632
0.693
0.299
0.359
0.372
0.412
0.434
0.419
0.188
0.341

Notes:
(i) Reported are the results for the difference-in-difference estimations with xt + kxt
1, where t = change period and
k takes the values 16. (ii) The t-values are reported and significance level is 10%.

contradicts findings that divestitures are positively evaluated by financial markets due to positive cumulative abnormal returns after the announcement of a divestiture (e.g. Mathur et al.,
2006). Nevertheless, divestments can be part of a retrenchment scheme due to a lack of strategic fit. A foreign affiliate might no longer be consistent with the corporate image and strategy.
Moreover, the management might have decided to restructure and refocus the existing
business.
2013 John Wiley & Sons Ltd

HOME FIRM PERFORMANCE, FDI AND DIVESTITURES

1491

All the findings remain unchanged when the sample is split with respect to the industry
affiliation and general technology level. We fail to detect any significant effect on outcome
variables listed in Table 6. The overall results for divesting firms show no substantial performance differences with respect to technology differences. Therefore, analysing reasons for
divestiture as well as transaction forms (selling, closing or spinning-off a foreign business)
might be essential in future research to further enhance the relationship between investment,
divestiture and subsequent corporate performance.
5. CONCLUSION

This paper analyses the effects of investing or divesting abroad on domestic enterprise performance in a French context. A propensity score matching combined with a DiD estimator is
applied to derive empirical findings.
We find a substantial rise in the export share for firms becoming engaged in outward
investments indicating that FDI and exports are complements rather than substitutes. This
might explain why the annual employment and turnover growth is up to 18 percentage points
larger in the post-change periods for new MNEs compared with non-investing firms. The
complementarity between FDI and exports is stronger for switching firms in high-tech industries than for switching firms in low-tech industries, which might indicate that high-tech firms
opt to a larger extent for home centralisation of certain products and/or vertical specialisation
than low-tech firms. From a policy perspective, the step of firms to internationalise is very
positive because of the steady and strong business development at home in subsequent years.
Apart from FDI, foreign divestitures are a central part of global business dynamics. Therefore, our study provides an unique contribution to the question on how divesting from abroad
affects home enterprise performance. Interestingly, the impact of real economic effects in
terms of export turnover, operating revenue, employment and productivity are negligible in
post-divestiture periods. Based on our findings, one can conclude that the home country does
not need not to fear negative repercussions from firms reverting to domestic operations, but
neither can it gain from foreign divestitures.
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