In analyzing firm productivity and efficiency in Belgium, this paper empirically shows that foreign firms are significantly more productive than domestic firms. Large differences in productivity between foreign firms and domestic firms exist even after controlling for other
finn characteristics put forward by theoretical models formalizing heterogeneity between firms. The productivity differential between foreign firms and domestic firms is explained by differences in scale and technical efficiency. Stochastic production frontiers using the translog form indicate that foreign firms exploit economies of scale more optimally through their large scale and capital intensive production processes. In addition foreign firms are
found to be significantly more (technical) efficient than domestic frrms in all industries. The differences are found to be largest between foreign 1ums and single-nation Belgian frrms, while Belgian MNEs resemble strikingly well the foreign subsidiaries active in Belgium in terms of returns to scale and efficiency. Together these results confirm the importance of firm specific advantages by MNEs. Finns self select and only the most efficient firms
become MNEs (foreign as well as Belgian owned) as they know have to compensate their liability of foreigness.