Review of Industrial Organization 15: 379–396, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
Ownership Advantages, Foreign Production and
Productivity: Evidence from Austrian
Austrian Institute of Economic Research, P.O. Box 91, A-1103 Vienna, Austria
Abstract. Multi-plant economies of scale generated by ﬁrm-speciﬁc assets form a constituent feature
of multinational ﬁrms. This paper uses a panel of Austrian manufacturing ﬁrms to test for multi-
plant economies of scale by examining the dependence of labor productivity in plants of the home
country on the volume of foreign production. As there is an inherent causality problem in testing
this proposition, the econometric estimates use a simultaneous equation framework. The estimation
results indeed indicate that ﬁrms which operate plants abroad achieve productivity advantages in
domestic plants. The same holds true for afﬁliates of foreign multinationals.
Key words: Multinational ﬁrms, productivity, panel estimates.
JEL: F23, C33, L11.
An important characteristic of multinational enterprises (MNEs) is their ability to
exploit multi-plant economies of scale generated by ﬁrm-speciﬁc assets. Often
MNEs additionally supply services, for example to gain world-wide reputation,
which generate externalities between different markets with similar effects on the
demand side. Due to the additional costs which usually arise when companies do
business in foreign countries, ﬁrms investing abroad with production costs exactly
equal to foreign incumbents cannot proﬁtably enter. They must be in the possession
of some special ownership advantages from ﬁrm-speciﬁc assets to compensate
(Markusen, 1995). According to Dunning (1988), besides internalization advan-
This paper was written during my stay at the School of Economic and Social Studies, University
of East Anglia. I am grateful for the kind hospitality and for the fruitful discussions there, as well
as for the comments of the participants in the WIFO-Workshop on Industrial Economics and the
8th Conference on Panel Econometrics in Göteborg, 1998. Especially, Karl Aiginger, Badi Baltagi,
Steve Davies, Peter Egger, Paul Geroski, Bruce Lyons and Dennis Mueller and an anonymous referee
provided constructive and useful comments. I am also indebted to Vera Lacina from the Austrian
Chamber of Labour for support in gathering data on foreign ownership. Financial support from
the “Fonds zur Förderung der wissenschaftlichen Forschung”, Austria, Grant-nr.: J01187-SOZ is