Foreign Investment, Corporate Ownership, and Development:Are Firms in Emerging Markets Catching Up to the World Standard?*

Abstract

Development implies that the efficiency of local firms converges to that of firms in advanced economies. We examine this using 1992-2000 panel data on virtually all industrial firms in the Czech Republic and Russia. We also test hypotheses that only firms near the efficiency frontier catch up. We find that privatization to domestic owners did not improve efficiency and firms are not converging to the frontier. Firms closer to the frontier are not more likely to converge. Foreign-owned firms displace local firms at the top of the efficiency distribution due to faster learning, acquisitions of more efficient firms and higher efficiency of foreign startups.