Foreign ownership, firm performance, and the geography of civic capital

•We model productivity of foreign firms as a function of provincial civic capital.•Foreign firm productivity dynamics is worse where civic capital is low.•As local civic capital increases foreign affiliates improve performance.•We also find that civic capital prompts managerial innovations in foreign firms.•Informal norms and institutions do affect foreign firm performance.

It is well established in the literature that foreign affiliates are subject to a series of governance and assimilation costs that may deteriorate their performance. This is particularly relevant for firms which have been recently acquired by foreign investors. We employ the variation in civic capital across Italian provinces as an exogenous determinant of these governance costs. We claim that the effect of foreign ownership on productivity is less favorable in areas where civic capital is low. As the level of local civic capital increases, the scope for opportunistic behavior is reduced, which makes the governance of foreign affiliates easier and improves their performance. We take this prediction to the data and find confirmation of our conceptual framework. Our analysis uncovers the importance of the geographic heterogeneity of informal norms and institutions in analyzing the nexus between foreign ownership and performance.