Foreign Firms and Productivity in Developing Countries∗

This paper assesses the performance of domestically and foreign-owned firms in a large sample of developing and transition countries. The detailed data allow a charac-terization of productivity and foreign firm presence across 118 countries, thus moving significantly beyond single country studies. A robust result is that foreign firms are more productive than domestic private firms, regardless of specification and accounting for unobservable heterogeneity across several dimensions. Accounting for observable firm level determinants of productivity, such as skilled labor, reduces the size of, but does not eliminate the statistically significant productivity advantage. However, it proves crucial to eliminate outlying observations through a careful econometric procedure since this re-moves a positive correlation between foreign firm presence in a sector and productivity. There are even some indications of a negative correlation