The World Economy

(2007)doi: 10.1111/j.1467-9701.2007.00875.x

© 2007 The AuthorsJournal compilation © 2007 Blackwell Publishing Ltd, 9600 Garsington Road,

156

Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA

Blackwell Publishing LtdOxford, UKTWECWorld Economy0378-5920© 2007 Blackwell Publishers Ltd (a Blackwell Publishing Company)January 2007301Original ArticleINTERNATIONALISATION, INNOVATION and PRODUCTIVITYDAVIDE CASTELLANI and ANTONELLO ZANFEI

Internationalisation, Innovation

and Productivity:

How Do Firms Differ in Italy?

Davide Castellani and Antonello Zanfei

Università di Urbino ‘Carlo Bo’, Italy

This paper addresses the issue of intra-industry heterogeneity and internationalisation. We show that, after controlling for sector, location, firm age and size, Italian manufacturing companies exhibit different economic and innovative performance according to their involvement in foreign activities. In particular, exporters show intermediate innovative performance between non-internationalised firms and thosecarrying out foreign production. Multinationals with a lower commitment to foreign markets, i.e. with non manufacturing activities abroad only, exhibit a higher productivity than exporters but they do not appear to innovate more than the latter. Heterogeneity in productivity is robust to controlling for innovation inputs and outputs, suggesting that the difference in economic performance cannot be entirely attributed todifferent innovative activities, and that the involvement in international operations can be a distinct channel of knowledge accumulation.

1. INTRODUCTION

R

ECENT developments in trade theory have tackled the issue of firm heter-ogeneity and internationalisation modes. The key prediction emerging

from this literature is that firms with different levels of productivity willgenerally engage in different modes of international activities, as these will beassociated with distinct sunk costs (Helpman et al., 2004). This interpretation hasclear, albeit not fully acknowledged, connections with a more consolidated viewemerged in the theory of international production, which has stressed the roleof ownership advantages in determining the choice to enter foreign markets.Firms must be endowed with some exclusive, proprietary asset, such as a superiortechnology or better managerial ability, to be able to face foreign competitorsand set up foreign activities (Hymer, 1960; Dunning, 1970; and Cantwell, 1989).More recent contributions have also emphasised that international activitiesmight enable firms to gain access to foreign knowledge sources and furtherreinforce such advantages (see Castellani and Zanfei, 2006, for a review).

This paper draws from complementary insights stemming from these differentstreams of literature and provides evidence on the relationship between firmheterogeneity and internationalisation modes, with specific reference to the Italianmanufacturing industry. We introduce two main novelties in the empirical analysis

The authors wish to thank John Cantwell, Chiara Criscuolo, Grazia Ietto-Gillies, Richard Kneller,Mauro Pisu and an anonymous referee for helpful comments and discussions. The usual disclaimersapply. Financial support from the Italian Ministry of University and Scientific Research (FIRBproject RISC-RBNE039XKA on ‘

Ricerca ed Imprenditorialità nella Società della Conoscenza:Effetti sulla Competitività dell’Italia in Europa

’) is gratefully acknowledged.

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of this issue.

First

, we extend the span of variables to capture intra-industryheterogeneity, by focusing on both productivity and measures of R&D andinnovative behaviour. This marks a departure from most contributions whichhave either focused on the former or on the latter type of indicators. By combiningboth types of measures, we can disentangle different aspects of firm performancesand separately examine their links with various internationalisation modes.Moreover, the available data allow us to test to what extent heterogeneity inproductivity is robust to controls for innovation inputs and outputs. Although wecannot make any conclusive statement on the direction of causality betweenfirms’ internationalisation and performances, we shall show that a higherinternational involvement is associated with a higher productivity for any givenlevel of innovativeness of firms. Therefore, our findings are consistent with therecently emerged view that cross-border activities may

per se

reinforce firms’competitive edge.

The

second

novelty of this paper will be to analyse the relationshipbetween (economic and innovative) performances and a further mode of inter-nationalisation, i.e. the creation of non-manufacturing activities abroad. That isa sort of intermediate category between pure exporters and the creation offoreign manufacturing affiliates. On the one hand, considering this furthercategory will enable us to test the robustness of the theoretical predictions. Onthe other hand, it will allow a more detailed analysis of the relationshipbetween internationalisation strategies and the different performance indicators.

The paper is organised as follows. Section 2 overviews the theoretical andempirical background to the paper. Section 3 illustrates the data we use, andSection 4 discusses the results of the empirical exercises we have carried out.Section 5 concludes.

2. PREVIOUS RESEARCH ON FIRM HETEROGENEITY AND INTERNATIONALISATION

Several streams of literature have considered the relationship between firmheterogeneity and internationalisation strategies. However, the issue has recentlybeen at centre stage with the increasing attention it has received in internationaltrade studies (see Greenaway and Kneller, 2006, for a review). Let us brieflyrecall these contributions, frame them in a broader analytical context andsummarise the main empirical results of empirical research on firm diversity andinternational involvement.

1

1

See Castellani and Zanfei (2006) for a more extensive analysis on the issue of heterogeneity andinternationalisation, which also covers differences in innovation and productivity performancesacross and within multinationals.

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a. Firm Heterogeneity and Internationalisation: The Trade Theory View

Helpman et al. (2004) mark an important departure in this field. In fact theirwork combines the analysis of two issues that have had a separate treatment. Thefirst issue concerns the choice between export and (horizontal) FDIs as a meansto serve foreign markets. The trade literature has tackled this issue mostly interms of the proximity-concentration trade-off: firms can be expected to investabroad when the gains from avoiding transport and tariff costs outbalance thecosts of maintaining capacity in multiple markets (Brainard, 1993). More precisely,the prediction is that firms are more likely to expand production horizontally,rather than exporting, the higher are transport costs and trade barriers, and thelower are fixed costs of entry and the size of scale economies at the plant level,relative to the corporate level. The FDI/export ratio can thus be expected to varyaccording to differences in trade costs and fixed entry costs observed acrosssectors.

2

However, as noted by Head and Ries (2003, p. 2), Brainard’s model doesnot predict which firms do which activity within sectors.

Here comes the second issue at stake in the model by Helpman et al. (2004):firm diversity. A number of recent empirical studies have highlighted that moreproductive firms tend to self-select into the export market.

3

This increasingevidence on the relationship between export and firm performance has given riseto a set of theoretical trade models explicitly allowing for firm heterogeneity(Bernard et al., 2003; and Melitz, 2004). Although evidence is not as extensiveas in the case of exports, there are also several empirical works documenting thatmultinationals tend to outperform firms with no investment abroad as in the caseof Doms and Jensen (1998) for the US, Barba Navaretti and Castellani (2004)for Italy, Criscuolo and Martin (2003) for the UK, De Backer and Sleuwaegen(2003) for Belgium, Pfaffermayer and Bellak (2002) for Austria. Helpman et al.(2004) are aware of some of this empirical literature and extend the originalmodel by Melitz (2004) to account for this further heterogeneity. They assumethat servicing a foreign market entails an entry (sunk) cost, due to the fact that,for example, firms need to acquire information on the foreign market, establishdistribution channels and find the appropriate suppliers of goods and services.Following Horst (1971), Hirsch (1976) and Buckley and Casson (1981), sunkcosts are assumed to be lower in the case of exporting than in the case of foreignproduction (i.e. FDI), but the former face higher marginal costs, due to suchindustry and host market factors as transport costs and tariffs. Given these sector-and country-specific characteristics, Helpman et al. (2004) show that

ex-ante

2

Using data on US export and foreign affiliate sales for 63 industries in 27 countries, Brainard(1997) provides an empirical test for this model.

3

See Wagner (2007) for an extensive review of such evidence.

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productivity differentials explain why firms choose different internationalisationmodes. In particular, the least productive firms should not be able to make anypositive profits in the foreign market, while those exhibiting the highest productivitycan overcome the extra costs associated with foreign production, and can henceafford to become multinationals. Firms with intermediate performance will mostlikely end up servicing foreign markets through exports. Rising trade costs willincrease the productivity threshold required to make exporting profitable and willlower the one necessary to make FDI preferable to exports. By the same token,higher fixed costs of operating foreign affiliates increase the level of productivityrequired to make FDI preferable to exporting. The model thus connects to a well-established tradition in the economics of international production, which hasemphasised that multinational firms must be endowed with some exclusiveownership advantage in order to be able to face competition in foreign markets(Hymer, 1960; and Dunning, 1970).

b. Explaining Firms’ Advantages and International Involvement

In spite of its clear merits which we have highlighted above, the perspectiveproposed by Helpman et al. (2004) and related literature has the important weaknessthat the origins of productivity advantages are not explored. Productivity levelsare assumed to be drawn casually from a probability distribution, and firms’behaviour varies accordingly for any given level of trade costs and of fixed costsof operating abroad. This simplifying assumption is indeed most frequentlyadopted in recent trade models, as surveyed by Tybout (2003); and reflects amore consolidated tradition in other fields of (micro)economics, as shown inGilbert (1989) and in Reinganum (1989). Making specific reference to this lattertradition, Nelson (1991, pp. 64–65) observes that a generalised view tends to bethat firms differ because of the luck of the draw, or an initial condition, which madedifferent choices profitable given certain market circumstances. However, if themarket circumstances were reversed so would be firm behaviours, even thoughsome delay or inertia may be allowed for in the modelling. When theseassumptions are made, there is not much sense attached to the word heterogeneity:‘There are firm differences but there is no essential autonomous quality tothem’ (p. 64).

Taking firm heterogeneity and its causes into account more seriously wouldimply, in Nelson’s view, a general reorientation in the analysis of economicbehaviour, a subject which cannot be dealt with here. However, one should atleast recognise that the approach by Helpman et al. (2004), by neglecting thecauses of inter-firm heterogeneity, underplays the role of investment decisionsdeliberately taken by firms to increase their own productivity and hence gaincompetitive advantages; and disregards that foreign operations may furtherreinforce such intra-industry diversity. Of course, one of the key sources of

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(productivity) advantages, and hence of heterogeneity, is firms’ accumulation oftechnological capabilities. Firms intentionally accumulate knowledge to increasetheir own competitiveness relative to their own main rivals in the final productmarket. By reducing unit costs relative to others in the same industry, firms withhigher technological capabilities (and hence ownership advantages) may bothincrease their margins and reduce prices, thus expanding their internationalmarket shares (Cantwell, 1989; and Cantwell and Sanna Randaccio, 1993).By contrast:

firms with the fewest or weakest ownership advantages in general hold their position moreeasily in domestic markets than in international markets owing to government support,consumer loyalty, the closeness of local business contact and so forth (Cantwell, 2000,p. 39).

This view, frequently dubbed in the literature as the ‘technological accumulationapproach’ to international production, thus sheds some light into the black boxof heterogeneity by emphasising that firms will differ in their internationalengagement according to their endogenous choices to invest in competencecreation and innovation.

4

But this is only part of the story. The choice of inter-nationalisation mode also interacts with the cycle of utilisation and generation oftechnological advantages. Given the partially tacit nature of knowledge developedby firms, its exploitation and use tends to require complex organisational devicesand the creation of internal networks within firms, especially when technology isapplied in different and (culturally and institutionally) distant contexts (Cantwell,1989; Kogut and Zander, 1993; and Vaccà and Zanfei, 1995). Furthermore, agrowing, albeit less established, literature has emphasised that internationalisation,and particularly manufacturing and R&D investments abroad, can be a funda-mental means to gain access to external knowledge sources that are complementaryto the specific assets a firm is already endowed with. The dynamic process ofknowledge accumulation through internationalisation has been dubbed in theliterature as ‘asset seeking’ (Dunning, 1993; Dunning and Narula, 1995; andNarula and Zanfei, 2005) or ‘home base augmenting’ (Kuemmerle, 1999), or‘technology sourcing’ FDI (Driffield and Love, 2003). This will generally requirethe combination of internal network development within multinational firms,with external networks involving partners active in the specific local markets inwhich foreign affiliates are active (Zanfei, 2000).

4

New trade theory models are now moving along a similar line. For instance, in a recent article,Yeaple (2005) assumes that heterogeneity arises because firms endogenously choose to employdifferent technologies and then systematically hire different types of workers. This only partiallyexplains heterogeneity: while intra-industry differences are not merely the result of a productivitydraw, as in Helpman et al. (2004), the lucky event is here assumed to be the choice among a setof given technologies.

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One can thus expect FDI and multinational expansion to reflect the need toutilise, and extract economic value from, the available knowledge. This strategyimplies some degree of retention of technology within the firm as well as someinteractions with external users. Moreover, the international generation ofknowledge requires extensive R&D efforts to be carried out internally, but alsocontacts and collaborations with external parties possessing localised knowledge.

Ex-ante

advantages, resulting from a firm’s history of technological accumulation,will provide guidance for further research as well as abilities to absorb externalcomplementary knowledge, wherever this may be available. This cumulative,interactive process is fuelled by, and contributes to, firm heterogeneity. AsCantwell (2000, p. 29) posits it:

By extending its own network, each firm extends the use of its unique line of technologicaldevelopment; and by extending it into new environments, it increases the complexity of itsdevelopment.

This discussion has two important implications for empirical analysis. On theone hand, innovation should be placed at centre stage when considering therelationship between heterogeneity and international strategies. On the otherhand, one should consider that firms’ international involvement can furtherreinforce their advantages and hence contribute to generating heterogeneity.

c. A Review of the Empirical Evidence

Several studies have produced evidence on the relationship between firmheterogeneity and internationalisation modes. However, most of them havefocused on firm diversity either in terms of productivity or in terms of innovation,but they do not examine them both. Moreover, the large majority of these worksanalyse the relationship between economic or innovative performances andindividual internationalisation strategies. This is the case of the extensiveliterature on export and firm productivity, which has documented that exporterstend to outperform non-internationalised firms and that this is mainly the resultof a self-selection process of the most efficient firms into export markets (seeWagner, 2007, for a comprehensive review of those empirical works).

A few studies provide evidence on the different productivity profiles associatedwith alternative internationalisation strategies. Helpman et al. (2004) test theirown theory using data of US affiliate sales and US exports in 38 countries and52 sectors. They do not only find evidence that sector/country-specific transportcosts and tariffs have a strong negative impact on export sales relative to salesof foreign affiliates, in line with earlier results obtained by Brainard (1997). Theyalso find that more heterogeneity leads to significantly more FDI sales relative toexport sales. They measure heterogeneity in terms of firm size, according to arecurrent albeit criticisable practice in economics literature. While identifying a

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relationship between size and productivity may be reasonable to simplify theanalytical treatment in a theoretical model, empirical work has shown that this isa rather poor proxy.

5

Several other studies have directly addressed the prediction of Helpman et al.(2004) that differences in productivity should correspond to different foreignmarket entry modes. Head and Ries (2003) use several indicators of performanceto differentiate firms in a sample 1,070 large Japanese companies classified in 17two-digit industries in 1991. These indicators range from sales to value added,approximate and estimated total factor productivity. They find that domesticfirms, exporters and firms investing abroad exhibit the predicted hierarchy inperformance levels (from the lowest to the highest performance) only when usingsales data, while much weaker support is found to the theory when using measuresof productivity. Furthermore, consistently with the criticism recalled above, Headand Ries (2003) find only a weak correlation between firm size and productivity.However, they show that among overseas investors, more productive firms spana wider range of host-country income levels, reflecting higher capabilities topenetrate different markets. Girma et al. (2004) compare sales, productivity andprofitability of purely domestic firms, domestic exporters and domestic multi-nationals with specific reference to Ireland for the year 2000. They utilise a non-parametric approach based on the principle of first-order stochastic dominance,and highlight that the distribution for multinationals dominates that of otherdomestic firms. By contrast they do not obtain evidence of clear differences inplant performance between domestic exporters and non-exporters. Girma et al.(2003) and Arnold and Hussinger (2005) apply the same non-parametric techniqueto UK and German data and find consistent evidence that the productivitydistribution of multinational firms dominates that of exporting firms, which inturn dominates that of non-exporters.

While these studies do not generally address the issue of how international-isation modes affect productivity, a few contributions highlight that higherdegrees of learning are associated with increasing commitment to internationaloperations. In particular, Kraay (1999) for China, and Castellani (2002a) forItaly, find that a higher share of foreign to total sales determine larger productivitygains to exporting firms. Barba Navaretti and Castellani (2004) apply matchingestimators to a sample of Italian firms investing in foreign production for the firsttime and show that such firms experience a higher growth both in productivityand in gross output after becoming multinationals relative to a counterfactual ofnational firms. Consistently with the idea that higher commitment to foreign

5

Firms may grow large for a variety of reasons that have nothing to do with technical efficiency,with technology or immaterial assets that translate into firm-level advantages. And small firms inmany sectors are more innovative than large ones. See Cohen and Levin (1989) for a review of theextensive and controversial literature on firm size and innovation.

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operations should determine higher learning effects, Castellani (2002b) finds thatfirms investing in non-manufacturing activities abroad do not experience thesame positive effect as firms setting up production facilities abroad.

Some works explore the relationship between efficiency and internationalisationusing innovation data. This helps to overcome the general criticism that appliesto studies based on productivity measures, whenever data on physical quantitiesare not available. However, as in the case of works on productivity, most of thesestudies focus on how innovation is associated with individual modes of inter-nationalisation. A number of empirical contributions have assessed the impact ofdifferent innovation measures and export propensity, as in the case of Wakelin(1998) for the UK, and Sterlacchini (2002) and Basile (2001) for Italy. A lowernumber of works have provided evidence on the relationship between innovationand other modes of foreign market entry. Fors and Svensson (2002) examine theimpact of R&D investments on foreign sales of Swedish multinationals. Frenzand Ietto-Gillies (2003) focus on the relationship between the degree of multi-nationality of UK firms and their innovative behaviour. Basile et al. (2003) buildan indicator of foreign expansion of Italian firms and find that firms’ innovativeactivities are important determinants of the degree of involvement in internationaloperations. Criscuolo et al. (2005) use a dataset similar to the one used in thepresent work and test for the role of global engagement in UK firms’ innovation,controlling for knowledge inputs. Their results are consistent with the idea thata higher propensity to innovate in multinational firms can be attributed to a betteraccess to internal and external stock of knowledge. However, to the best of ourknowledge, there is no study analysing how differences in

both

productivity andinnovation are associated with

alternative

modes of entry in foreign markets.

3. DATA

The empirical analysis presented in this paper is based on a dataset resultingfrom the intersection of two different sources: the Second Community InnovationSurvey (CIS) and ELIOS (European Linkages and Ownership Structure). Theformer is a survey based on a common questionnaire administered by Eurostatto firms from all European countries, which aims at assessing various aspects offirms’ innovative behaviour and performances. Subject to a confidentiality agree-ment, we were allowed to access micro data for Italy from the second wave of thesurvey (CIS2).

6

In particular, we gathered information on the number of workersengaged in R&D activities in 1996, and on a set of (time-invariant) binary indicatorson the innovative behaviour, such as whether each firm introduced product orprocess innovation, applied for patents, or engaged in technological collaboration

6

We thank Giulio Perani from the Italian National Statistical Office for allowing us to access the data.

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with other firms within their group, with competitors, with clients and with suppliers,over the period 1994–96. Table A1 in the Appendix provides a more detaileddescription of the type of variables gathered from the CIS2 questionnaire.

Innovation data were complemented with data on multinational status from theELIOS dataset developed by the University of Urbino, Italy, which combinesinformation from Dun & Bradstreet’s

Who Owns Whom

and Bureau Van Dijck’s

Amadeus

. The sample resulting from this matching comprises 778 domestic-owned manufacturing firms.

7

Exploiting information on exports, available from theCIS for the year 1996, and information on subsidiaries controlled abroad, availablefrom ELIOS for the same year, we broke down the sample distinguishing betweenfirms serving only the domestic market (DOM), firms serving foreign markets

only

through exports (EXP) and two types of multinational firms, namely thosethat control

only

non-manufacturing (mainly sales) subsidiaries in foreign markets(MNF1) and those controlling at least one manufacturing plant abroad (MNF2).

As illustrated in Table 1, approximately one-half of the sample firms serve theforeign markets only through exports, 21 per cent control non-manufacturingactivities abroad and 16 per cent are multinational firms controlling foreignmanufacturing activities. A relatively small proportion of the sample is not inter-nationalised.

8

It appears from the rather large average size of firms that oursample is biased against small enterprises and is very likely to under-representnon-internationalised firms. This bias derives from the fact that

Who Owns Whom

(from which we draw information on ownership and multinationality) has anextensive coverage of firms belonging to groups of two or more firms, while it doesnot cover small independent firms. However, the sectoral distribution of the samplefirms (reported in Table A2 in the Appendix) turns out to be not significantlydifferent from the original CIS sample of 5,256 firms (which is representative ofthe whole population of Italian firms).

Finally, for each of the sample firms we computed two measures of productivityexploiting balance sheet data obtained from

Amadeus

. In particular, we obtainedlabour productivity as the ratio between value added (deflated using a two-digitsectoral GDP price index) and total employment, while total factor productivity

7

The overall sample resulting from the intersection includes 1,114 firms, but for the purpose ofthis study, we excluded from the analysis foreign-owned firms. Elsewhere, we use the same datasetto assess differences in productivity and innovative behaviour of foreign- and domestic-ownedmultinationals and address the issue of productivity spillovers from multinational firms (Castellaniand Zanfei, 2006). Balcet and Evangelista (2005) utilise part of the same dataset to characteriseinnovative patterns of foreign-owned firms in Italy.

8

It is worth mentioning that EXP are firms internationalised

only

through exports and MNF1

donot

control any foreign manufacturing activities. However, one should take into account that thelatter group includes 156 out of 164 firms which are engaged also in exporting, while out of 123firms carrying out international production (MNF2) 117 are also exporting and 79 are engaged inother non-manufacturing activities abroad as well. In other words, moving along the

continuum

from DOM to MNF2 commitment to foreign markets increases.

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(TFP) was estimated as the residual of a Cobb-Douglas production function (withlabour, capital and materials as inputs), for each two-digit industry (NACE) usingthe semi-parametric approach proposed by Levinsohn and Petrin (2003).

4. RESULTS

Following recent models in international trade theory as well as previousdevelopments in economic literature, in Section 2 we have argued that firmsinvolved in exporting activity can be expected to outperform purely domesticfirms, while multinational firms should reach higher performance than the former.

In this section we discuss some evidence on how firms differ according to theirinternationalisation modes. In Table 1 we report the means and standard devia-tions in size (number of employees), productivity (both value added per workerand TFP), share of R&D personnel on total employment, for the domestic market(DOM), firms serving foreign markets through exports (EXP) and multinationalfirms, distinguishing firms controlling only non-manufacturing activities (MNF1),and firms engaged in international production (MNF2). Such basic statistics supportthe idea that increasing commitment to international activities are associated withlarger firm size, productivity and R&D. Further support to this hypothesis can bedrawn from Figures 1 and 2, where the cumulative distributions of TFP and of

TABLE 1Distribution of the Sample and Basic Characteristics, by Internationalisation Status

Internationalisation Status*

Firms No. of Employees

Value Added Per Worker

TFP** Share of R&D PersonnelNo. Per Cent

DOM 99 13 458 135 3.95 0.014 (873) (72) (3.10) (0.058)

EXP 399 51 403 139 5.56 0.029 (713) (77) (4.16) (0.070)

MNF1 164 21 830 143 6.91 0.034(1,526) (105) (5.60) (0.075)

MNF2 123 16 1,764 181 10.38 0.039(6,746) (211) (19.95) (0.053)

Total 785 100 760 147 6.64 0.030(3,064) (119) (9.63) (0.068)

Notes:For each characteristic we report the unconditional mean and the standard error (in parentheses).* Internationalisation status: Firms serving only the domestic markets (DOM), Firms internationalised throughexport, but not through FDI (EXP), Multinational firms controlling only non-manufacturing plants abroad(MNF1), Multinational firms controlling at least one manufacturing plant abroad (MNF2).** TFP is obtained as the residual of a Cobb-Douglas production function estimated for every two-digit NACEsector using the Levinsohn and Petrin (2003) semi-parametric approach.

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FIGURE 1Cumulative Distribution of the Log of TFP, by Firm Type

FIGURE 2Cumulative Distribution of the Share of R&D Personnel on Total Employment, by Firm Type

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the share of R&D personnel for the four groups of firms are compared.

9

Inparticular, productivity in multinational firms with foreign production dominatesthat of all the other groups of firms for any value of the cumulative distribution;MNF1 dominate EXP; and the productivity of firms serving only the domesticmarket lies at the right-hand side of that of the other groups. The same orderingcharacterises the cumulative distribution in terms of the share of employmentengaged in R&D activities: firms with higher involvement in internationalactivities tend to have a systematically higher share of people in R&D activities.This is also reflected in the fact, reported in Table 2, that the share of firms whichintroduced process or product innovation, which applied for patents or hadtechnological cooperation increases with the involvement in international markets.

However, the differences we have illustrated so far might well reflect anumber of firms’ characteristics, which affect productivity, innovation and inter-nationalisation, such as the size of the firm, as well as the sectoral and geographicalcomposition. In order to take (at least partially) these sources of heterogeneityinto account, we rely on parametric analysis. We ran regressions of variousmeasures of productivity and innovative behaviour on three dummies identifyingDOM, MNF1 and MNF2, using the largest group (EXP) as baseline categoryand controlling for other exogenous firms’ characteristics, such as sector andgeographic location dummies, and dummies for the size of the firm (measured interms of the number of employees). Coefficients on the three dummies reflectpercentage differences in productivity and innovative behaviour of the variousgroups relative to exporters. For productivity measures we could use simple OLSregressions, while for measures of innovation we relied on

tobit

(when we usedthe share of employees engaged in R&D activities) and

probit

(in all other cases).We computed an

F

-test (in the case of OLS) and a chi-squared test (in the caseof

probit

and

tobit

) to assess also whether differences between MNF1, MNF2and DOM were significantly different from zero. In Table 3 we summarise thedifferences across the four types of firms in the various measures of innovationand productivity and report their significance levels. Both economic and innovativeperformances vary according to firms’ engagement in international markets, witha few important qualifications.

First, estimates for both measures of productivity suggest that multinationalswith manufacturing activities abroad perform better than multinationals withnon-manufacturing activities; and the latter outperform both exporters and purelydomestic firms. Differences in productivity between exporters and purely domesticfirms in our sample, which we found in Figure 1 and Table 1, are not robust to

9

Here we rely on visual comparison of cumulative distributions, without a formal test of stochasticdominance, as in Girma et al. (2004 and 2005) and Arnold and Hussinger (2005). Further on in thepaper we shall consider differences in means, controlling for various firms’ exogenous character-istics in a regression framework.

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TABLE 2Basic Indicators of Firms’ Innovative Behaviour, by Internationalisation Status*

Share of Firms which:

Applied for Patents in 1994–96(Per cent)

Introduced Technological Innovations in Products in 1994–96(Per cent)

Introduced Technological Innovations in Processes in 1994–96(Per cent)

Had Technological Collaboration with Other Firms within the Group in 1994–96(Per cent)

Had Technological Collaboration with Competitors in 1994–96(Per cent)

Had Technological Collaboration with Clients in 1994–96(Per cent)

Had Technological Collaboration with Suppliers in 1994–96(Per cent)

DOM 12.1 28.3 40.4 9.1 2.0 4.0 2.0EXP 28.3 59.1 59.9 7.3 6.0 6.5 5.5MNF1 40.2 68.9 66.5 8.5 5.5 6.1 7.3MNF2 46.3 79.7 77.2 26.8 10.6 10.6 13.8

Total 31.6 60.5 61.5 10.8 6.1 6.8 6.8

Notes:* Internationalisation status: Firms serving only the domestic markets (DOM), Firms internationalised through export,

but not

through FDI (EXP), Multinational firmscontrolling

only

non-manufacturing plants abroad (MNF1), Multinational firms controlling

at least one

manufacturing plant abroad (MNF2).

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TABLE 3Conditional Differences in Firm Performances and Innovative Behaviour, by Internationalisation Status

MNF2 vs. MNF1

MNF2 vs. EXP

MNF2 vs. DOM

MNF1 vs. EXP

MNF1 vs. DOM

DOM vs. EXP

No. of Obs.

Productivity premia

(1) Value added per worker 0.098*** 0.152*** 0.153*** 0.053** 0.054

−

0.001 2,953(2) TFP

§

0.069*** 0.168*** 0.155*** 0.098*** 0.085** 0.012 2,937

Difference in

(3) Share of R&D personnel 0.015 0.021** 0.087*** 0.005 0.071***

−

0.066*** 785

Diff. in the propensity to

(4) Innovate products 0.091 0.161*** 0.459*** 0.069 0.367***

−

0.299*** 785(5) Innovate processes 0.090 0.128** 0.271*** 0.038 0.181**

−

0.143** 785(6) Apply for patents 0.028 0.063 0.177** 0.034 0.148**

−

0.115** 785(7) Cooperate within the group 0.129*** 0.116*** 0.077 −0.013 −0.051 0.039 785(8) Cooperate with competitors 0.015 −0.006 0.025 −0.022* 0.010 −0.032*** 737(9) Cooperate with clients 0.037 0.016 0.028 −0.021 −0.008 −0.012 721

(10) Cooperate with suppliers 0.035* 0.020 0.048* −0.015 0.012 −0.028* 721

Notes:Internationalisation status: Firms serving only the domestic markets (DOM), Firms internationalised through export, but not through FDI (EXP), Multinational firmscontrolling only non-manufacturing plants abroad (MNF1), Multinational firms controlling at least one manufacturing plant abroad (MNF2).Estimates are obtained from OLS regressions (equations (1) and (2)), tobit regressions (equation (3)) and probit regressions (equations (4–10)) controlling for size,sector, region and time dummies (only 1 and 2).Asterisks denote confidence levels (*** p < 0.01; ** p < 0.05; * p < 0.10).§ TFP is obtained as the residual of a Cobb-Douglas production function estimated for every two-digit NACE sector using the Levinsohn and Petrin (2003) semi-parametric approach.

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controls for firms’ size, as well as sectoral and locational characteristics, but thismight partially reflect a bias in favour of large companies in our sample. Second,multinationals controlling manufacturing activities abroad employ a highershare of workers in R&D activities and exhibit a higher propensity to introducetechnological innovation in products and processes, to apply for patents andestablish technological collaborations with other units within the same group;10 whilethe innovative behaviour of multinationals controlling only non-manufacturingsubsidiaries abroad do not differ significantly from mere exporters. Non-internationalised firms appear to be the least engaged in R&D and to innovate lessthan exporters. It thus appears that a higher engagement in international activitiesis associated with greater R&D and innovativeness.

Our results are in line with the predictions by Helpman et al. (2004) that themore productive firms are more likely to engage in internationalisation modesentailing higher sunk cost. Furthermore, increasing commitment to internationaloperations is also associated with higher innovative effort, higher propensity toinnovate, and a higher propensity to engage in technological collaboration withingroups. The latter finding is loosely consistent with the technological accumulationview, suggesting that a two-way link exists between innovation and international-isation. On the one hand, firms will deliberately invest in R&D and innovationto gain advantages and compete in international markets. On the other hand,international production favours access to foreign knowledge sources and, throughwithin-group technological collaboration, enhance firms’ advantages.

However, no strong causal interpretation can be given to these findings. Infact, even if we control for structural characteristics (such as size, sector andlocation of each firm), our set of dummies is likely to pick up some unobserved,firm-specific characteristics, such as managerial ability, which might affect both theinternationalisation mode and innovative activity (or productivity). Unfortun-ately, the fact that our set of internationalisation dummies are time invariantdoes not allow us to apply panel data techniques, while no good instrumentalvariable could be constructed with the available data to deal with this endogeneityproblem. Given these constraints, we are forced to interpret the coefficients onour explanatory variables in Table 3 as simple differences in means, conditionalon sector, age and location.

In Table 4 we try to alleviate this problem by estimating the relationshipbetween internationalisation status and productivity, controlling not only forstructural characteristics, but also for innovation outputs (captured by dummiesindicating the introduction of process and product innovation and the applicationfor a patent) and inputs (such as the share of employees engaged in R&D, and a

10 MNF2 are also more innovative than MNF1, but this difference is imprecisely estimated, so thatwe cannot reject the null hypothesis of no differences between the two groups of firms.

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TABLE 4Internationalisation, Innovation and Productivity

Dependent variable: log of TFP§

Method OLS OLS OLS OLS OLS OLS

TFP premium (baseline: EXP)MNF2 0.164*** 0.159*** 0.150*** 0.143*** 0.125*** 0.130***

(0.024) (0.025) (0.024) (0.024) (0.024) (0.024)MNF1 0.097*** 0.096*** 0.093*** 0.087*** 0.090*** 0.097***

(0.021) (0.021) (0.021) (0.021) (0.021) (0.021)DOM 0.023 0.033 0.054 0.051 0.049 0.060

(0.039) (0.039) (0.039) (0.039) (0.039) (0.039)

Implied differencesMNF2 – MNF1 0.066*** 0.062** 0.056** 0.056** 0.035 0.033MNF2 – DOM 0.140*** 0.125*** 0.096** 0.091** 0.076* 0.070MNF1 – DOM 0.073* 0.063 0.039 0.035 0.041 0.036

Control variablesShare of R&D

personnel0.594*** 0.529*** 0.447*** 0.383*** 0.365*** 0.353***

(0.131) (0.129) (0.126) (0.117) (0.116) (0.114)Process innovation 0.052*** −0.004 −0.025 −0.030 −0.032

(dummy) (0.020) (0.022) (0.022) (0.022) (0.022)Product innovation 0.108*** 0.076*** 0.067*** 0.065**

(dummy) (0.024) (0.025) (0.025) (0.025)Patent application 0.144*** 0.134*** 0.134***

(dummy) (0.020) (0.020) (0.020)Tech. coop. within

group (dummy)0.162*** 0.156***

(0.031) (0.033)Tech. coop. with

competitors (dummy)0.237***

(0.044)Tech. coop. with

clients (dummy)−0.060(0.042)

Tech. coop. with suppliers (dummy)

−0.019(0.036)

Constant Yes Yes Yes Yes Yes YesSector dummies Yes Yes Yes Yes Yes YesRegion dummies Yes Yes Yes Yes Yes YesSize dummies Yes Yes Yes Yes Yes YesTime dummies Yes Yes Yes Yes Yes Yes

Adj. R-squared 0.638 0.639 0.641 0.646 0.649 0.652No. of Obs. 2,937 2,937 2,937 2,937 2,937 2,937

Notes:Internationalisation status: Firms serving only the domestic markets (DOM), Firms internationalised throughexport, but not through FDI (EXP), Multinational firms controlling only non-manufacturing plants abroad(MNF1), Multinational firms controlling at least one manufacturing plant abroad (MNF2).Robust standard errors in parentheses below estimates. Asterisks denote confidence levels (*** p < 0.01;** p < 0.05; * p < 0.10). § TFP is obtained as the residual of a Cobb-Douglas production function estimated for every two-digit NACEsector using the Levinsohn and Petrin (2003) semi-parametric approach.

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set of dummies indicating whether the firm had any technological cooperationwith other partners within the group, with competitors, clients or supplies). Inother words, we measure what remains of the productivity premium accruing tomultinational firms once differences in innovative activities are accounted for.This would help to isolate the role of international involvement from the othervariables which might be associated with productivity advantages of firms.

Results in Table 4 show that the productivity premium of multinational firmsdiminishes once we control for a firm’s engagement in R&D activities and itspropensity to innovate. In particular, the introduction of product innovationseems to capture much of the productivity premium of MNF1-type of firmsrelative to non-internationalised firms (DOM). This suggests that it would bemisleading to view differences in productivity as the result of the ‘luck of thedraw’: R&D and product innovation strategies account for a significant share ofintra-industry heterogeneity. However, firms which are multinational strictusensu (i.e. those controlling manufacturing activities abroad, MNF2) remainsignificantly more productive than exporters and non-internationalised firms evenafter controlling for innovative strategies of the latter. It is worth mentioning alsothat technological collaboration within the group seems to account for a largefraction of the productivity premium of Italian multinationals. In particular, thelargest drop in the MNF2 premium versus EXP and DOM is just associated with theintroduction of this variable. This is consistent with the idea that multinationalfirms’ advantages are largely associated with their possibility of accessing geo-graphically dispersed sources of knowledge, and of transferring this knowledgewithin the group through intra-firm networks of collaboration (see Castellani andZanfei, 2006, Ch. 1, for a discussion of the literature on multinational intra- andinter-firm knowledge generation and transfer). Furthermore, the fact that thedifference between MNF1 and MNF2 turns non-significant when controlling forintra-group collaboration, also suggests and that this ability is mainly associatedwith controlling an international network of production, rather than a network ofsales affiliates.

5. CONCLUSION

The paper has highlighted how intra-industry heterogeneity in Italy is asso-ciated with different internationalisation modes. We have shown that firms with ahigh engagement in foreign activities, also exhibit better economic and innovativeperformances. Companies with the highest international involvement, namelyfirms with manufacturing activities abroad, are characterised by both the highestproductivity premia and the highest R&D efforts and innovative performances.However, multinationals with a lower commitment to foreign markets, i.e. withnon-manufacturing activities abroad only, do show levels of productivity that

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stand between those of multinationals with manufacturing activities abroadand those of mere exporters; but they do not innovate more than the latter. Thisis consistent with some recent modelling in trade theory and with moreconsolidated views in the economics of international production, suggesting thatmore productive firms will self-select into international markets, but also thatcommitment to foreign markets may boost firms’ productivity and propensity toinnovate.

Besides, we found evidence that a higher commitment to foreign marketsmay be per se associated with a higher efficiency of firms, even controlling forinnovation inputs and outputs. In particular, our results are in line with the viewthat an international network of production affiliates may allow access to geo-graphically dispersed sources of knowledge, which can be partially transferredback to the parent company though intra-firm technological collaboration.

APPENDIX

TABLE A1Definition of Variables Constructed from the CIS2 Questionnaire

Variable Question Type

Product innovation Has your enterprise introduced any technologically new or improved products in the period 1994–96?

Binary

Product innovation Has your enterprise introduced any technologically new or improved processes in the period 1994–96?

Binary

R&D personnel How many workers (in full-time equivalents) has your enterprise employed in R&D activities in 1996?

Continuous

Patent application Did your enterprise apply for at least one patent in 1994–96 in any country?

Binary

Technological cooperation within the group

Did your enterprise have any cooperation agreement on technological innovation activities* with other firms within the same group in 1994–96?

Binary

Technological cooperation with competitors

Did your enterprise have any cooperation agreement on technological innovation activities* with competitors in 1994–96?

Binary

Technological cooperation with clients

Did your enterprise have any cooperation agreement on technological innovation activities* with clients in 1994–96?

Binary

Technological cooperation with suppliers

Did your enterprise have any cooperation agreement on technological innovation activities* with suppliers in 1994–96?

Binary

Notes:* Cooperation agreements on technological innovation are defined as ‘the active participation in R&D or otheractivities with other firms and institutions aimed at obtaining some technological innovation’. Commercialsuccess of the joint projects is not a necessary condition. Insourcing of innovative activities are not included inthe definition.

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TABLE A2Sectoral Distribution of Italian Firms in the CIS2 and in CIS-Elios

NACE Sector No. of Firms in the CIS2 (Per cent)

No. of Firms in the CIS-Elios Dataset (Per cent)

No. of Firms Used in this Paper* (Per cent)

15–16 Food, beverages and tobacco 370 7 65 5.9 45 5.717 Textiles 431 8.2 77 6.9 70 8.918–19 Apparel and leather 507 9.7 55 4.9 48 6.120–21–22 Wood, paper and publishing 475 9 83 7.4 64 8.123–24 Chemical and petrochemicals 276 5.2 132 11.8 64 8.125 Rubber and plastic products 260 4.9 64 5.7 43 5.526 Other non-metallic mineral products 291 5.5 59 5.3 47 627 Basic metals 180 3.4 65 5.8 53 6.828 Fabricated metal products 604 11.5 74 6.6 54 6.929 Machinery and equipment n.e.c. 658 12.5 179 16 126 16.130–31 Electrical machinery and office equipment 263 5 79 7.1 55 732 Radio, television and communication eq. 88 1.7 26 2.3 12 1.533 Medical, precision and optical instruments 122 2.3 34 3 22 2.834–35 Motor vehicles and other transport eq. 201 3.8 61 5.5 35 4.436 Furniture; manufacturing n.e.c. 530 10.1 64 5.7 47 6

Total 5,256 100 1,117 100 785 100

χ2 test** 20.29 12.36p-value [0.120] [0.577]

Notes:* The sample used in this paper is smaller than the overall CIS-Elios dataset, as it does not include affiliates of foreign multinationals in Italy.** Tests whether the sectoral distribution of the CIS-Elios sample is significantly different from the original sectoral distribution of the CIS2.

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