Direct Investment Decisions Research Articles

Does prior success influence risk‐taking in foreign location decisions? A prospect theory perspective

AbstractResearch SummaryResearch suggests that foreign direct investment decisions can be biased and deviate from economic theory. This study deploys prospect theory to analyze the impact of the success of previous investments on risk‐taking in subsequent investment decisions. Our theorizing suggests that prior success influences foreign investors' decisions to take host‐country risk, and that this moderating influence on the risk‐investment relation is specific to the type of risk. The results of an event‐history study of 1259 location decisions support the notion that the success of previous investments encourages investors to enter host countries with high negative or positive risk, whereas it discourages them from entering locations with high mixed risk. The effects are stronger for investment locations that are similar than for those that are dissimilar.Managerial SummaryRegarding the varying risks that investors face in foreign countries, investment decisions may sometimes appear rather confident and sometimes rather cautious. Our study relates these decisions to the success that investors had with similar investments in the past, since research suggests that experiencing gains or losses can influence decision behavior. The results suggest that prior success affects risk‐taking in foreign direct investment decisions and comes in contrary forms, depending on the type of risk: prior success leads to overconfident investment decisions in the case of negative and positive risk, whereas it induces overcautious investment decisions in the case of mixed risk. Being aware of these behavioral tendencies can prevent managers from making biased investment decisions.

Distribution margins and distribution-oriented FDI: Evidence from China

This paper constructs a new measure of distribution margins that covers more countries than that in the World Input–Output Database. Based on this measure, we develop a set of stylized facts and examine the effect of distribution margins on exporters' distribution-oriented foreign direct investment decision using customs data and foreign direct investment decision data from China. We find that higher distribution margins in destination countries drive exporters to conduct distribution-oriented foreign direct investment. Compared with specialized export intermediaries, manufacturers have a greater incentive to invest in distribution sectors abroad when faced with higher distribution margins.

Role of Optimal Investment Timing using Real Option Valuation to Support Foreign Direct Investment Decision Making

Role of Optimal Investment Timing using Real Option Valuation to Support Foreign Direct Investment Decision Making

The challenges of economic freedom and the influence on financial performance of China's development: A strategic approach

Background: As one of the world's most important economies, China has faced the problems and challenges caused by geopolitical changes, the consequences of the COVID-19 coronavirus pandemic, financial crises and other challenges in the last decade to the fullest extent. An overview of previous research studies shows the effects of partial elements of economic freedom on the financial performance of China's development. The focus of our research is on a strategic approach to the given problem, taking into account the possibility of modeling and improving the situation in response to new challenges and problems in the future. Purpose: The focus of the work is aimed at measuring the impact of economic freedoms on foreign direct investment decisions and the financial performance of China's development. Based on that, the main goal of the work is to model and determine new elements for improving the model based on a strategic approach. Study design: The research revealed that a strategic approach through the elements of economic freedom is an important factor of the model we investigated and represents the improvement of the situation and can contribute to the improvement of the financial performance of China's development. Findings: Based on the research, we obtained the result of a high degree of direct dependence and a positive correlation of the impact of economic freedom and strategic decisions on foreign direct investment on the financial performance of China's development. Economic freedoms represent a significant influencing factor and provide opportunities for the improvement of a model based on a strategic approach. Limitations: The limitations of the research refer to the unpredictable state of geopolitical changes in the world, which directly reflect on many factors of the model. Future research directions can be directed towards measuring which countries make up the largest part of China's foreign direct investments, as well as how much their influence is.

Nonlinear relationships between Foreign Direct Investment decisions and environmental degradation in high- and middle-income countries

Globalization, although beneficial in spreading knowledge and improving green technologies worldwide, is also considered one of the main drivers of global warming. Recent world events, such as the pandemic, with all its economic and social consequences, have exposed the external dependence of many countries, particularly the reliance of many developing countries on foreign investment. Although it contributes to economic growth, Foreign Direct Investment may also be harmful to the environment. Hence, this study analyses the impact of Foreign Direct Investment on emissions of Greenhouse Gases, Carbon Dioxide, Nitrous Oxide and Particulate Matter 2.5. A Panel Autoregressive Distributed Lag model was conducted for a group of 25 high-income and 10 middle-income countries from 1995 to 2019, allowing the analysis of short- and long-run impacts. Given the likelihood of nonlinear impacts, a Nonlinear Panel Autoregressive Distributed Lag model was also conducted to provide a more detailed understanding of the effects of expansion or contraction on the variables, and also to analyse short- and long-run impacts. The main findings suggest that electrification and energy transition away from fossil fuels to renewable energy may be crucial to limiting the polluting effect of Gross Fixed Capital Formation, Trade Openness and Foreign Direct Investment. However, it would be a mistake to simply reduce these three factors as the results reveal that it also contributes to increase pollution. Foreign Direct Investment and Trade Openness reduce environmental degradation in high-income countries and increase it in middle-income countries, except for Nitrous Oxide emissions.

Legal and Cultural Contingencies in the Foreign Portfolio Versus Foreign Direct Investment Decisions Across Countries: An Institutional Fit Perspective

Legal and Cultural Contingencies in the Foreign Portfolio Versus Foreign Direct Investment Decisions Across Countries: An Institutional Fit Perspective

Does the Aging of the Chinese Population Have an Impact on Outward Foreign Direct Investment?

Given the progression of population aging in China, does the diminishing demographic dividend boost the promotion of investment abroad in the form of outward foreign direct investment (OFDI)? This empirical study focused on the influence of population aging on outward foreign direct investment (OFDI) decisions and its underlying mechanisms. The research found that population aging has a significant positive effect on the level of OFDI. This effect is particularly pronounced in the eastern and central regions, while not statistically significant in the western region. Furthermore, population aging has a significant impact on the factor cost effect and the technological progress effect. The former is characterized by increased labor costs, while the latter is associated with technological advancements. The study confirmed that population aging positively influences OFDI changes through these two mechanisms. The empirical results hold statistically significant after multiple robustness checks. This study holds a significant reference value in advancing the facilitation of high-level opening-up polices and policy coordination to effectively address the challenges posed by population aging.

The effect of economic coercion on companies’ foreign direct investment decisions: Evidence from sanctions against Russia

Existing research on the relationship between economic coercion and foreign direct investment suggests that sanctions have no effect on investments in targeted countries or may even encourage investment inflows. A key limitation of this research, however, is its aggregate country-level focus, which fails to capture company-level decision-making processes and factors shaping them. In contrast, this paper evaluates multinational companies’ investment plans as reflected in new investment announcements and shows that sanctions in fact lead to significant adjustments in multinational companies’ plans to invest in a targeted country. Our company-level analyses of new investment projects in Russia show that companies are less likely to announce new investments after the imposition of economic sanctions against the country.

Spatial outward FDI: Evidence from China's multinational firms

AbstractThis paper studies the impacts of geographic proximity and investment connection on the outward foreign direct investment (OFDI) decisions by Chinese multinational firms, including both greenfield investment and cross‐border merger and acquisition. We model firms' OFDI expansion with the lagged spatial structure, and collect outward FDI data of 3479 Chinese multinational firms from 2002 to 2013 whose investment destination covers more than 160 countries. We find that the spatial expansion of firms' existing OFDI play an important role in shaping their future investment decisions. Firstly, firms tends to invest in destinations that are closer to China, and expand further into destinations that are geographically closer to their existing OFDI locations. This is the geographic network effect. Secondly, we also find that firms are more likely to invest in countries with more intense FDI from China, and extend their OFDI networks to destinations with stronger investment connections with their existing subsidiary locations. This is the investment network effect. We show that these two effects are robust to alternative investment and geographic network measures and further controls.

Foreign Direct Investment Decision Making: Perceived Environment Uncertainty and Digital Capability

Foreign Direct Investment Decision Making: Perceived Environment Uncertainty and Digital Capability

The Role of Risk Tolerance in Mediating the Effect of Overconfidence Bias, Representativeness Bias and Herding on Investment Decisions

This study aims to analyze the impact of Overconfidence Bias, Representativeness Bias, and Herding towards investment decision making through Risk Tolerance, where psychological and social factors could have effect on the investors' decision making process. The sample was gathered using Snowball Sampling technique on 200 stock investors who have made transactions in the Indonesian Stock Exchange. The data was analyzed using SEM PLS with Smart PLS 3.2.9 application. The result shows that Overconfidence Bias and Representativeness Bias have significant impact on both direct and indirect investment decision making process through Risk Tolerance. On the other hand, Herding shows no effect on direct and indirect investment decision making process through Risk Tolerance.

Managerial foreign experience and outward foreign direct investment: Evidence from China

We examine whether managerial foreign experience facilitates corporate outward foreign direct investment (OFDI) decision. Using hand-collected manager biography data from Chinese public companies, we find that there is a positive association between managerial foreign experience and OFDI. Mechanism analysis shows that returnee managers can improve corporate willingness of risk-taking, and thus promote the probability of OFDI. Moreover, the facilitation effect is greater when firms have managers with foreign experience obtained in the OFDI destination countries. While both foreign work and study experience promote OFDI, the effect is more significant when returnee managers hold senior positions. Lastly, managerial foreign experience is associated with improved performance of outward investments. This study enriches the emerging literature on cross-country knowledge transfer in international business by providing evidence on the economic consequences of managerial experience.

Internationalization under attack: the external threat of short sellers

PurposeThe purpose of this paper is to examine the role of short sellers in foreign direct investment (FDI) decisions. Drawing on threat rigidity theory, the authors argue that short sellers pose a threat to chief executive officers (CEOs) by exerting downward pressure to target firms’ stock prices. That threat will evoke rigid managerial responses that hinder new FDI activities. The authors also posit that CEOs will be less reactive to short sellers’ threats when they are generalist CEOs who have extensive general work experience or when they serve as the board chair.Design/methodology/approachThe authors collect data from S&P 1,500 firms, and the final sample consists of 717 firms and 6,930 firm-year observations from 1998 to 2016. The authors use an Arellano and Bond generalized method of moments static linear probability panel data model and an instrumental panel count data model to test the hypotheses.FindingsThe findings support the hypotheses and suggest that CEOs who are under more pressure from short sellers engage in fewer new FDI activities. The negative impact of short sellers on FDI decisions is less salient when CEOs have general work experience or are the chairperson of the board.Originality/valueThis study contributes to the international business research by stressing the need to consider the role of short sellers in firm internationalization decisions.

How does home and host-country policy uncertainty affect outward FDI? Firm-level evidence from China.

How the foreign direct investment behavior of enterprises changes in response to the risks and instability of government economic policy changes is a relevant issue which, however, has not been extensively studied yet. Accordingly, this paper establishes a linear probability regression model to study the foreign direct investment behavior of Chinese A-share listed companies in 13 countries between 2003 and 2020 and explores whether multinational companies change their OFDI decisions when the economic policy environment of China and trade-related countries are unstable. A firm heterogeneity analysis and phased discussions were conducted, and a robust conclusion was finally drawn. The results show that (1) China's economic policy uncertainty promotes China's foreign direct investment, while the host country's monetary policy uncertainty inhibits China's foreign direct investment. (2) The foreign direct investment decisions of enterprises are affected not only by the macroeconomic and policy environment of the two trading countries but also by their development characteristics. (3) Sino-US trade frictions and the financial crisis have different effects on China's foreign direct investment.

Institutional quality, asset specificity, and foreign direct investment

This article demonstrates that MNC's foreign direct investment decision is linked with institutional quality and hinges on the asset-specificity intensity of FDI. Using a comprehensive global FDI database between 2003 and 2019, our results show that MNCs tend to engage in FDI of high asset-specificity in countries with superior institutional quality, while they launch FDI of low asset-specificity in countries with inferior institutional quality. Moreover, when engaging in FDI of high asset-specificity, MNCs take property rights institutions more seriously, and prefer the sole proprietorship model to the joint venture model there.

Firm outward direct investment and multinational activity under domestic taxes

AbstractWe study the effect of domestic corporate tax on firms' outward direct investment (ODI) decisions. We exploit a tax unification reform in China that raises corporate income tax rates on foreign‐funded firms but reduces those on domestic Chinese firms. Using a difference‐in‐differences estimator that compares the ODI of foreign affiliates and joint ventures with private domestic firms before and after the reform, we find that a higher domestic corporate tax rate increased the ODI of foreign firms, particularly for joint ventures with Chinese majority shareholders. We show evidence that the increases in firm ODI reflect production relocation out of China.

Pengaruh Risk Tolerance dan Religiusitas terhadap Keputusan Investasi dengan Literasi Keuangan sebagai Variabel Moderasi

The purpose of this study is to determine the effect of risk tolerance and religiosity on direct investment decisions, as well as the effect of either moderated or unmoderated by financial literacy. Quantitative research with a descriptive approach is the type of research in this study. The population of this study were active students of the Faculty of Economics, Maulana Malik Ibrahim State Islamic University, Malang. Meanwhile, the sample of this research is 100 students who invest in the capital market selected by purposive sampling technique and Slovin formula. The research data this time is primary data tested using SmartPLS 3 software with analytical techniques in the form of descriptive statistics, outer models, and inner models. The results of this study indicate that there is a positive and significant influence of religiosity and financial literacy on investment decisions, while risk tolerance has no effect on investment decisions. In addition, it was also found that the role of financial literacy in moderating the relationship between religiosity and investment decisions, but failed to moderate the relationship between risk tolerance and investment decisions.

Back to roots: TMTs’ country-specific experience, FDI preference, and political center favoritism

This paper investigates how the origin experience and work experience of top management teams (TMTs) affect foreign direct investment (FDI) decisions of multinational enterprises (MNEs), drawing on learning theories and social capital view. Using data from Standard and Poor’s firms operating in China during 2014–2016, we find that TMTs’ country-specific origin experience and work experience have a positive impact on the extent of FDI in the focal country, while we find that the former has a greater impact. Consistent with the consideration of being deeply anchored in the specific country, we find that TMTs with origin experience, relative to work experience, are more likely to choose FDI locations in the political center. We further find that the effect of origin experience on the extent of FDI and the preference for political centers will be more pronounced for MNEs with low levels of profitability. This study contributes to the literature on international business and provides practical implications for international expansion.

Do oil prices and oil production capacity influence decision making and uncertainty in the financial market? Evidence from Saudi Arabia

The aim of this study is to investigate the relationship between oil prices and oil production capacity and financial market performance in the Kingdom of Saudi Arabia and how oil prices and oil production capacity influence the decision making and uncertainty factors in Saudi Arabia’s financial markets. The key variables considered are oil prices and oil production capacity in the Kingdom of Saudi Arabia. Other variables such as foreign direct investment decisions and domestic investment decisions are adopted to explore their impact and reaction to the various risks identified. Therefore, data was collected from online sources to analyze qualitative and quantitative information to understand risks, uncertainties and decision-making considerations. The findings of this paper indicate that rising oil prices increase the value of the Saudi Arabian financial market. The study showed that the diversification of the investor portfolio increases the stability of Saudi Arabia’s financial market. Also, the KSA’s financial market volatility primarily reflects oil price fluctuations, and the Saudi Arabian oil production capacity directly affects its financial market performance. Saudi Arabia’s oil production was also found to pose insignificant risk to long-term economic growth and stability, thereby putting investors’ long-term investments at risk. The study also showed that investors in Saudi Arabia’s financial market fail to objectively analyze risks by focusing on short-term high-profit margins from oil prices. AcknowledgmentAll authors have contributed equally to this paper.

Articles: Multinational enterprises and the welfare state

This paper presents an empirical analysis on the extent to which a country’s welfare spending influences foreign direct investment (FDI) decisions, particularly as they relate to relocations. We argue, and subsequently empirically test, that higher welfare spending by governments attracts foreign investment. Moreover, multinational enterprises (MNEs) located in high welfare spending countries have a lower likelihood of relocating to foreign markets compared with MNEs in countries with lower levels of welfare spending. Using data for MNEs in 27 OECD countries, our results show that MNE location decisions are positively related to welfare spending. These findings appear to be more pronounced for MNEs operating in high-tech rather than in low-tech manufacturing industries. Our results suggest that high welfare spending does deter FDI in the case of host developing economies, but that these effects are small. We suggest that this is a result of firms being more hesitant to invest in developing countries where they will be expected to contribute to welfare. This suggests that a degree of trust between firms and host country governments is required on institution building and the delivery of welfare. Our results suggest that the conventional wisdom of firms avoiding or relocating away from locations due to the associated additional costs of high welfare spending is questionable, but that firms need to be confident on the efficacy of this welfare expenditure.