Foreign acquisition and internal organization

We study the effect of foreign takeovers on firm organization. Using a comprehensive data set of Portuguese firms and workers spanning two decades, we find that foreign acquisitions lead to: (1) an expansion in the scale of operations; (2) a higher number of hierarchical layers; and (3) higher wage inequality between the top and bottom layers. These results accord with a theory of knowledge-based hierarchies in which foreign takeovers lead to improved productivity, higher demand, or reduced internal communication costs, and thereby induce the acquired firms to reorganize. Evidence from auxiliary survey data reveals that acquired firms are more likely to use information technologies that reduce internal communication costs.