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- 3.2 Competitiveness proxies: Productivity, trade performance, skills, and innovation

Competitive investment, often associated with foreign multinationals, drives economic growth. This lies with the type of foreign multinational and its ability to compete and grow in global markets. Whether by boosting labor productivity, enhancing innovation, or utilizing skills, developing countries need a bigger pie to be able to advance the development agenda, and need to compete with established producers abroad in an increasingly globalized context.

In the following, we examine some of the fundamental characteristics of competitive firms – productivity, export orientation, investment in R&D, skills utilization and transfer – and compare their incidence across foreign multinational and domestic firms in the 30 most populous developing countries in the sample of the World Bank Enterprise Surveys on which we have information.

# Productivity

Foreign-owned firms tend to be more productive than domestically-owned firms. Numerous studies have highlighted this pattern in the past, as well as its effects on the productivity of domestic firms. The reason for the productivity premia of foreign firms lies in their possession of more advanced technology and managerial know-how than local firms. To be competitive in markets outside of their home economy, foreign multinationals need to have some competitive advantage, thereby overcoming their ‘liability of foreignness’ (Zaheer, 1995). The cost of entering a foreign market, their lack of local networks and customer knowledge mean that foreign firms require other firm-specific assets to overcome these liabilities. Such assets can take the form of knowledge-related capacities, which can ultimately enhance productivity in the host economy.

The picture that emerges in two simple indicators of productivity is broadly consistent with these premia (see Fig. 2). Total Factor Productivity (TFP) differences in manufacturing across firms vary considerably across countries, reflecting the level of sophistication, the scale as well as the structure of manufacturing production, that more intensively attracts foreign investors. Markets that stand out by attracting productive foreign multinationals tend to combine large size and high integration into global value chains, such as China, Indonesia, Mexico and Ethiopia. Examples of countries where the average foreign multinational firm would appear to be less productive than domestic ones, such as the Russian Federation, are an exception, while in a number of cases, such as Malaysia, Nigeria, or Kenya, joint ventures with some foreign participation stand out with higher productivity than majority-owned foreign establishments.

How do these productivity premia of foreign MNEs translate into development effects? The question has been extensively studied, with the largest body of evidence pointing to productivity increases to local firms (Alfaro, 2015; Blalock and Gertler, 2009; Echandi et al., 2015; Havranek and Iršová, 2012; Meyer and Sinani, 2009; Wooster and Diebel, 2010). This can take place through different channels – labor mobility, demonstration and competition