Technology spillover from foreign-owned firms in Japanese manufacturing industry

This paper shows that in the short run an increase in foreign firms' industry share lowers the total factor productivity (TFP) growth of Japanese firms as a result of the decrease in market power. However, in the long run, the entry of foreign-owned firms has a positive effect on the productivity of local firms as a result of technology spillovers. In addition, the results suggest that foreign firms exert competitive pressure that forces Japanese firms with a high level of technological capabilities raise their productivity growth. (C) 2007 Elsevier Inc. All rights reserved.