Foreign Direct Investment in the Context of Global Value Chains and Superstar Firms

Abstract

The emergence of GVCs and recently superstar firms has been well documented, but less attention has been paid to what these joint developments mean for how we think about and need to examine FDI. Against this setting, I explore four dimensions of FDI: its conceptual aspects, measurement, determinants and implications. I show that including relevant aspects of GVCs and superstar firms emphasizes better both the highly productive and “monopolistic” nature of superstar firms as well as the equity and non-equity investments that such firms make to organize production at the global level. Following this definition, there are multiple measures and recently novel datasets that allow to examine new and decisive mechanisms that dictate determinants and implications of FDI. From the analysis emerges that relational costs of production, firm-level characteristics and changes in global economic environment are important FDI determinants (additional to country-level issues). I find that the new data (and advances in underlying firm-level theories) allow to study more clearly the various (coinciding) mechanisms affecting firm productivity after foreign entry, which shows positive effects, although evidence on competition effects is limited and distributional effects exist. It too highlights an important implication previous unobserved: that the most productive firms tend to self-select into FDI, which plausibly increases market concentration in global markets, which may change how the various mechanisms affect domestic firms and workers upon foreign entry.