How performance gaps between domestic firms and foreign affiliates matter for economic policy

Empirical evidence showing that foreign affiliates perform better in almost all areas than their domestic counterparts is piling up. Yet, contrary to arguments of the public debate, it is not primarily foreign ownership which accounts for performance gaps between domestic firms and foreign affiliates. Firm-specific assets, firm characteristics, the home country of the parent firms and the transnationality of the firm matter more. Based on a survey of 56 empirical studies, this article establishes a relationship between the size of the performance gaps and the main economic effects of foreign direct investment on the host economy (spillovers; agglomeration effects; market structure; locational competition). The article concludes that policies should be gap-specific rather than ownership-specific. Several gap-specific policies are proposed, focusing on different groups of target firms.