|FDI upstream service×Top firms|(0.059)|-0.036*<br>(0.017)|||
|---|---|---|---|---|
|Sector-by-year trend<br>Year FE|Yes<br>Yes|Yes<br>Yes|Sector-by-year trend<br>Year FE|Yes<br>Yes|
|Firm FE|Yes|Yes|Firm FE|Yes|
|Observations|1477|1477|Observations|707|
|Firms|322|322|Firms|153|

Note: The table reports the estimates of linear regressions. Standard errors clustered at the sector level are reported in parenthesis. Significant at *10%, **5%, ***1%. Results refer to the entire period. All independent variables are lagged one period. Distance from the frontier is time invariant and is measured by the difference between the average productivity of a firm in the first 2 years, and the average productivity of firms in the top quantile of the distribution. Frontier firms are those in the top 2 quintiles of the distribution of average TFP in the first 2 years.

Finally, we observe that the effect on productivity possibly materializes through an increase in innovative activities. For the subsample of firms that have invested in intangible assets, our proxy for innovation, at least once over the period (innovators in column 3 of Table 12) we find that FDI in upstream services is positively associated with innovative investment. Hence, this evidence is suggestive of the link between upstream FDI in services and downstream firms’ productivity operating through the mechanism of increased investment in innovation. The existence of knowledge spillovers from FDI in services has been recognized in the literature (Blind and Jungmittag 2004). Foreign-owned firms tend to enjoy some technological advantages that make their engagement with the domestic market profitable. In the service sectors, these largely involve intangible assets, which, given their only partial excludability, can generate knowledge spillovers to firms that utilize the services. Indeed, evidence suggests the presence of information and knowledge flows from foreign firms to their domestic customers and a consequent learning-from-supplier effect (Crespi et al. 2008). There is also evidence that increasingly goods embody some accompanying services, which themselves can be considered a form of innovation in products. Both forms of FDI-induced innovation would result in an increase in investment in intangible assets. Ultimately, investment in intangible assets has been found to increase productivity, not only in relation to its R&D component, but also in the form of organizational capital, ICT, and firm-specific human capital (Syverson 2011; Battisti et al. 2015), and stimulate firm growth (Hosono et al. 2020).

# **6. Conclusions**

This paper examines productivity dynamics of publicly listed firms in Pakistan, and the extent to which integration in the global marketplace explains their productivity growth. We rely on firm-level data on publicly listed firms in non-banking sectors in Pakistan over the period 2012-2017. We adopt a standard approach in the literature to estimate productivity and measure changes in input tariffs and upstream FDI presence. Estimating the effect of integration on productivity is challenging because integration policies are shaped by governments that respond to some extent to private sector interests. We show that in the case of Pakistan the concern is valid, and, following the literature, we address this identification problem by focusing on a narrow window for which this concern is dissipated by the data.

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