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We examine the extent to which the knowledge or technological capability of foreign affiliates actually enhances the performance of their parent companies. Our results draw on a firm-level panel of more than 1600 multinationals and more than 4000 of their overseas affiliates, covering 46 home and host countries. We find considerable evidence of enhanced parent productivity as a result of their affiliates’ performance, which we interpret as evidence of reverse knowledge transfer from affiliates to parents. This effect is robust to different tests including IV estimation and a falsification exercise based on unconnected ‘matched’ affiliates. We find that both physical and strategic location markedly affects the affiliate-parent relationship, and that distance reduces the positive impact that affiliate performance has on that of the parent.
