(Why) do Foreign-owned Firms in Germany Achieve Above-average Productivity?

The aim of this chapter is to analyse whether productivity differentials between industrial firms can be explained by foreign ownership. The question if and why foreign-owned firms (FOFs) achieve higher productivity than indigenous firms is less ambitious compared with the aim of numerous studies that try to assess the effect of inward foreign direct investment (FDI) on the domestic economy. It is, nonetheless, highly relevant for economic policy. Labour productivity is a key factor for the development of the labour market. It determines both the volume of labour input and the income potential. If FOFs were more productive than indigenous firms, one could assume that more FDI would increase the domestic income level.1 The effect on the demand for labour is less clear: the demand for labour would be expected to fall to the extent to which the growth of hourly productivity exceeds that of production. In this case, without a reduction in working hours the manpower requirements would decrease. On the other hand, increased productivity can mean improved competitiveness and thereby open up new employment opportunities. To explain the development of productivity is therefore one of the central tasks of labour market research. The question why differences in productivity may exist is of interest since if FOFs have above-average productivity, this is not necessarily because of differing behaviour.