Lunch-time Seminar

Foreign Ownership Gone, Inspiration Gone? : Analysing the Effect of Foreign Divestment on Divested Affiliates’ Innovation Performance — Haiou MAO

28 Jun 2019

Institut für Weltwirtschaft


Haiou MAO (China Institute of Boundary and Ocean Studies and School of Political Science and Public Administration)


This paper examines the effect of a divestment by a foreign owner on innovation performance of the divested affiliate. We use firm level data for China, combining production data from the Annual Survey of Industrial Enterprises with patent data from the Chinese State Intellectual Property Office. We compare the innovation performance of divested subsidiaries with that of continuing foreign-owned subsidiaries, controlling for the possible selection using propensity score reweighting combined with covariate adjustment. We find a positive effect of divestment on patent applications by the affiliate. The estimated treatment effects imply a substantial increase by about a half due to the divestment. By contrast, there is no statistically significant increase in R&D investment as a result of the divestment. We show that this overall result is mirrored for divested affiliates with minority foreign ownership. Those divested by majority owners also experience an increase in patenting, but also show a decline in R&D activity. We attribute this to Chinese FDI policy. Another important finding is that foreign divestment does not appear to be the reverse of foreign acquisitions. We find that acquisitions by foreign owners also stimulate patenting activity, in a similar way as foreign divestments. Hence, we may conclude that the within firm adjustment processes due to both of these ownership changes acts as a catalyst and reallocates resources to more efficient use.


Media Room (A-211)