Essays on Firm Performance, Innovation, and Cross-Border Economic Activity

This thesis is composed of three essays that explore different facets of firm performance, innovation, and cross-border economic activity.

The first essay documents a systematic shift in the nature of innovation in information technology (IT) towards increasing dependence on software. Using a broad panel of US and Japanese publicly listed IT firms in the period 1983-2004, it shows this change in the nature of IT innovation had differential effects on the performance of the IT industries in the United States and Japan, resulting in US firms increasingly outperforming their Japanese counterparts, particularly in more software-intensive sectors. It also provides suggestive evidence that human resource constraints played a role in preventing Japanese firms from adapting to the documented shift in IT innovation.

The second essay asks whether the United States have a comparative advantage in applications-related software research. It classifies software patents into downstream and upstream software inventions based on a unique classification algorithm, then offers empirical evidence that downstream software research is disproportionally concentrated in the United States, and that U.S. firms are significantly less likely to locate downstream software research projects offshore than upstream research projects. It also explores self-citation and co-invention patterns of software patents and provides suggestive evidence that U.S. firms may use intra-firm knowledge flows to mitigate challenges of conducting downstream software research remotely. Finally, it explores the sources for the observed U.S. advantage in downstream software research and provides initial empirical evidence supporting the hypothesis that it is at least partially due to the relative abundance of lead users of software within the United States.

The final essay uses a rich panel dataset of Slovenian firms in the period 1994-2010 to examine how receiving foreign investment impacts the subsequent performance and behavior of local firms. Using a variety of propensity score based estimation techniques, it shows that foreign investment leads recipient firms to subsequently significantly expand the scale and scope of their activities. In addition, the essay explores how heterogeneity in investor origin modulates the effects of foreign investment, and it shows that investor origin heterogeneity is indeed important for understanding local firms’ ex post performance, the scale of their operations, the scope of their product mix and their geographical presence in export markets. It finds, for instance, that firms receiving investment from advanced country investors subsequently broaden the scope of their product mix and the number of export destinations they serve, while those receiving investment from developing country investors decrease their scope in terms of product space and geographical coverage. The empirical analysis is motivated with a theoretical model in which local firms endogenously chose their product mix and export destinations. The model details how receiving foreign investment affects the way firms alter their ex-post behavior, and then shows that predictions of the model align closely with the empirical results. The findings in this essay suggest that incorporating investor heterogeneity and the multi-product and multi-destination nature of firms yields important insights for furthering our understanding of how foreign investment impacts recipient firms.