Innovation and Foreign Ownership

This paper uses a rich panel dataset of Spanish manufacturing rms (1990-2006) and a propensity score reweighting estimator to show that multinational rms acquire the most productive domestic rms, which, on acquisition, conduct more product and process innovation (simultaneously adopting new machines and organizational practices) and adopt foreign technologies, leading to higher productivity. We propose a model of endogenous selection and innovation in heterogeneous rms that jointly explains the observed selection process and the innovation decisions. Further, we show in the data that innovation on acquisition is associated with the increased market scale provided by the parent rm.