16 February 2000 • The Impact of Internationalised Production on the Domestic Growth of Firms • Michael Pfaffermayr

The increase of foreign production by domestic firms can be understood as part of a firm's growth process. Especially when exports are impeded by rising marginal costs of production or transportation, firms will tend to move their production gradually abroad in the course of their growth process.

This paper uses data supplied by the Investment Surveys of 1989-1998, which WIFO conducts annually in co-operation with the EU's DG II among approximately 1,500 manufacturing firms, of which about 700 supplied complete answers. The study found several empirical regularities related to growth in sales from domestic production and a firm's volume of foreign production. Firms with a high share of foreign production are more export-oriented than the average company, suggesting a complementary relationship between foreign and domestic production from a static point of view. The internationalised firms have attained a critical minimum size and are mainly active in technology-intensive industries. In addition there is evidence that firms with foreign affiliates also grow more dynamically at home. The above-average growth achieved by firms which have expanded strongly into international markets – either through exports or by foreign production – suggests that the performance of a firm is essentially determined by firm-specific competitive advantages, while the advantages or disadvantages of location seem to play a secondary role.

The econometric analysis confirms that larger firms on average grow more slowly (regression to the mean in the studied test group of firms) and also that, despite their above-average size, internationalised firms maintain and sometimes even expand their growth potential at home. In particular, firms which followed a strategy of high rates of exports and foreign production achieved above-average growth at their domestic location in Austria. Since internationalised firms in general achieve higher levels of productivity than the industry average we cannot conclude, however, that the above-average development of sales can be translated directly into an above-average performance with respect to employment.