FDI Decisions Research Articles

Trade Policies and FDI with an Endogenous Market Structure

Abstract Given an endogenous market structure, this research investigates the effects of tariff and equivalent quota policies on foreign firms’ FDI decisions. Findings show that foreign firms have symmetric (asymmetric) decisions in terms of FDI versus export under a tariff (quota) policy. Furthermore, FDI is more likely to occur under the tariff than the quota regime, but the former is definitely more (less) desirable than the latter in terms of domestic (world) welfare. Finally, a more cost-efficient firm is more likely to engage in FDI under either the tariff or the quota regime.

Multinational Firms and Economic Integration: The Role of Global Uncertainty

This paper develops a three-country, two-sector, two-factor general-equilibrium trade model in which multinational firms’ FDI decisions are influenced by global uncertainty level. We investigate the effects of economic integration under uncertainty, and highlight an important new type of FDI which is certainty-seeking. A numerical general-equilibrium model has been explored to study in depth the endogenous regime changes with six different firm types. Among others, we show that multinational firms are highly influenced by global uncertainty level, so that even the same economic integration process leads to significantly different global market structure.

Autocratic Union Organization and Foreign Direct Investment in the Mexican Automotive Parts Sector, 2004–2018

Abstract Due to its size and importance, the Mexican automobile industry was an important topic in negotiations for the usmca agreement. A particularly contentious issue was the allegation that foreign direct investment (fdi) in Mexican parts plants has been facilitated by autocratic unions affiliated with the Confederation of Mexican Workers (ctm). Although this issue has been widely noted, there has been little systematic research on the topic. In this paper, we seek to fill this gap in the literature. Using panel data, we examine the determinants of fdi in the automotive parts sector in Mexico’s 31 states and Mexico City (formerly df) from 2004 to 2018. The study makes four contributions to the literature. First, we demonstrate empirically that fdi in the sector concentrated in Mexican states with a higher lagged unionization rate. Second, controlling for the type of union organization, the study shows that fdi was positively associated with states where the ctm was already well-established in the automobile industry. Alternatively, fdi was negatively associated with states where independent and democratic unions had previously organized. Third, we clarify the conditions under which firms prefer pre-emptive unionization with the ctm to the alternative of union avoidance. Finally, the study points to the importance of education and transportation infrastructure in fdi decisions.

History Matters: Colonial-Based Connectivity and Foreign Headquarter Location Choice

In this study, we argue that European countries’ extensive relationships with former colonies represent a location factor that attracts foreign headquarter investments. The strategic role of foreign headquarters as coordinators, opportunity detectors, and global bridgeheads makes the location choice of headquarter activities sensitive to historical-based institutional connections. Drawing on a sample of 2230 foreign headquarter investments in Europe, we find that the stronger the combined effect of historical connections and current economic relationships with former colonies, the higher the probability of attracting headquarter investment projects. We refer to this combined characteristic as colonial-based connectivity. The study findings support the hypothesis that past colonial relationships and historical context influence FDI decisions and location preferences. We contribute to the literature by advancing the understanding of foreign headquarter location choices, and by demonstrating the importance of historical context in international business research. We emphasize how the former colonial influence continues to confer advantages upon some countries, including the attraction of FDI.

THE ROLE OF SOCIAL NETWORKS IN FOREIGN DIRECT INVESTMENTS: THE CASE OF TURKISH BUSINESS GROUPS

Bu çalışmanın amacı, Türk işletme gruplarının sahip oldukları ağ yapılarının doğrudan yabancı yatırım kararları üzerindeki etkisini incelemektir. Bu doğrultuda işletme grubu düzeyinde ele alınan sosyal ağ yapıları (merkezilik ve arasındalık boyutlarında) örtüşen yönetim kurulları bağlamında değerlendirilmektedir. Çalışmanın kapsamı, kasıtlı örneklem yöntemine göre belirlenen 13 işletme grubundan, bu işletme gruplarına bağlı şirketler olarak faaliyet gösteren 83 bağlı işletmeden oluşmaktadır. Çalışmada öncelikle toplamda 96 işletmenin (13 holding ve 83 bağlı şirket) 1997-2019 yılları arasında elde edilen verileri ile ağ yapıları (merkezilik ve arasındalık dereceleri) ortaya konulmaktadır. Sonrasında da çalışma kapsamında geliştirilen hipotezler, panel regresyon modelleri aracılığıyla test edilmektedir. Çalışmanın bulguları, işletme grubu düzeyinde derece merkeziliğinin işletme gruplarının DYY karar ve faaliyetlerini olumlu yönde etkilediğini ortaya koymaktadır. Çalışma kapsamında elde edilen diğer önemli bulgu ise işletme grubu düzeyinde arasındalığın işletme gruplarının DYY faaliyetleri üzerinde herhangi bir etkisinin olmadığını göstermektedir.

Foreign direct investment inflow: The drivers and motivations in MENA Region

Purpose ― Reasons why Multinational Enterprise (MNEs) engage in foreign direct investment (hereafter referred to as FDI) abroad have been of great interest to policy markets, academia and international portfolio investors. This examines FDI inflow motives to the Middle East and North Africa (MENA) region for the period 2005 to 2019. Design/methodology/approach ― This research paper applies both the static and dynamic panel methodologies such as SYS-GMM, fixed effects, and pooled OLS estimators to investigate the motivational factors of MNEs FDI inflows to MENA countries. Findings ― Although specificity applies to countries, estimated results suggest that MNEs in the MENA region are predominantly interested in serving both home and host markets. Other motives such as efficiency-seeking FDI vary across countries, indicating that FDI motives are not homogeneous among region members. This paper provides useful insight for both firms and host countries in the region. Originality/value ― This research paper investigates the factors that motivate MNEs to consider FDI decisions in MENA countries. Rather than investigate the individual countries within the region as done in existing literature, this research paper simultaneously examines MNEs' investment motivations in the MENA region. The findings are significant, plausible and in line with the economic development of most countries in the region.

Main Determinants Influencing Inward and Outward Foreign Direct Investments in Thailand: Comparisons and Vital Implications

Abstract Foreign direct investment (FDI) has played an important role in the evolution of globalization and is the cornerstone of industrial expansion and economic development. From 1988 to 1990 till now, Thailand has been one of the main destinations of FDI, namely inward FDI (IFDI). However, outward foreign direct investment (OFDI) increased rapidly from 2003 to 2011, and it continues to grow. Although initially a net importer, Thailand has transformed into a net exporter of direct investment in 2011. Since 2003, Thailand has entered a stage of re-emergence of OFDI, and this growth trend of OFDI will continue in the future. The purpose of this study is to investigate the main determinants of Thailand's IFDI and OFDI, and apply a panel data model to determine which determinants have a significant impact on Thailand's IFDI and OFDI. We considered the FDI flows between Thailand and its five FDI partners (Japan, Hong Kong, the Netherlands, Singapore and the United States) from 1997 to 2014, where IFDI was 1997-2014, and 2004-2014 was OFDI. Regarding the determinants of Thailand's IFDI and OFDI, the market size (relative per capita GDP), Thailand's openness, relative R&D intensity and bilateral trade agreements have a positive impact on FDI decisions for both IFDI and OFDI. Relative wages and geographic distance have opposite effects on Thailand's IFDI and OFDI. Specifically, our empirical results show that market size is the most important determinant of IFDI inflows into Thailand, while the most important determinant of Thai OFDI is bilateral trade agreements. JEL classification numbers: F14, F23, F43. Keywords: Foreign Direct Investment, Panel Data Model, Fixed Effects, Generalized Least Squares (GLS).

Leveraging the benefits of location decisions into performance: A global view from matched MNEs

We examine how firms leverage their resources, through FDI decisions into profits growth. Drawing on over 19,000 multinational firms, we employ a matching process and find that while investment in developed countries leads to productivity improvement, profits growth is not automatic, but requires continued productivity growth. Contrasting the emphasis placed on different firm-level resources by the resource-based view and the knowledge-based view, we show that a firm’s capability to invest in firm-specific assets accelerates the speed of reaping the rents from knowledge seeking FDI in developed countries. In addition, profits growth as a result from investing in developing countries is greater for firms who appoint foreign directors from the same global or regional cluster as their foreign subsidiaries. Moreover, developing country MNEs, if properly deploying their firm resources, can leverage the benefits of FDI location into performance better than developed country MNEs.

The effect of information frictions on FDI persistence

We examine the extent to which firms' familiarity with the investment environment and efficiency of financial markets of the host economies reduce information frictions and in turn affect persistence of FDI. In a simple model of firm learning, we derive the optimal investment equation and estimate it using panel data on bilateral FDI flows. We find that the persistence of FDI is higher when firms invest in developing economies, in distant economies, in economies that are dissimilar to their home country, and when financial markets are less efficient. We interpret the results in the context of our model that when a firm is unfamiliar with the investment environment and financial markets play a limited role in providing information, it is unable to process information from recent signals about its productivity, and is therefore more reliant on its past performance in making future FDI decisions, which raises the persistence of its FDI. Therefore, FDI's apparent stability is not necessarily a positive signal for the host economy as it can result from information frictions.

Networks of foreign affiliates: Evidence from Japanese micro‐data

AbstractThe paper provides evidence of the investment patterns of Japanese multinational enterprises (MNEs) across countries and industries and analyses the main drivers of their location strategies, using detailed micro‐data on Japanese parents and their affiliates including the final destination of affiliate sales. The breakdown of affiliate sales by destination market reveals that Japanese MNEs establish services affiliates primarily to maximise proximity to local customers, while foreign affiliates in manufacturing sectors tend to engage more widely with third countries. Yet, some economies emerge as strategic gateways to other destinations in their region. The empirical analysis delves into the drivers of host country attractiveness for FDI seeking new markets, production efficiency and to act as regional or global platforms. Important factors shaping Japanese FDI decisions include trade and investment policies in goods and services, deep FTAs, as well as streamlined customs procedures. Furthermore, well‐calibrated rules for digital commerce and investments in digital infrastructure and innovation contribute to attracting MNEs. Overall, the paper stresses the factors behind better integration into global production networks and the policy priorities to attract various types of FDI inflows.

Foreign direct investment and financial markets influences: Results from the United States

This paper investigates the linkages among Foreign Direct Investment (FDI-greenfield and mergers and acquisitions (M&A)) decisions and equity market returns and volatilities. The central premise is that FDI decisions by Multinational Enterprises (MNE) are influenced, among other factors, by risk and uncertainty indicated by equity market returns and volatilities in the destination (host) countries. This is because of the events on the stock markets in general, and their volatilities, in particular, signal the vitality of the investment climate of the target country. Including capital market variables among the determinants of FDI is important for assessing the cost of capital and for evaluating direct investment and asset allocation decisions.Secondary time-series data (quarterly) were used on incoming US FDI from 1994 to 2018 along with data on independent variables such as exchange rates, inflation, market size, equity market returns, and equity market volatilities. Thus, the paper endeavors to contribute to the International Business literature by highlighting the role played of equity returns and volatilities in FDI decisions and therewith attempts to integrate finance (capital markets) with International Business/Strategic Decision making. Several different regression specifications (OLS, Fixed, and random-effects and VAR) were utilized to analyze the data, and capital market variables (stock returns and volatilities) were found to influence the location of production facilities by a multinational enterprise (MNE). In other words, the share of production capacity optimally located abroad, as well as M&A decisions, are influenced by capital market returns and volatilities.

The role of nation brand in attracting foreign direct investments: a case study of Korea

PurposeDrawing on the six-dimensional framework of the Anholt-GfK Nation Brands Index (NBI), the purpose of this paper takes a government-to-business (G2B) perspective of international marketing by shedding light on how governments (as sellers) can harness their nations’ brand image to attract businesses (as buyers) to invest in the country.Design/methodology/approachUsing Korea as context, this study interviewed Korea-based foreign multinational companies (MNCs) to elucidate how nation brand had influenced their FDI decisions to establish R&D centres in Korea. Purposive sampling identified 36 MNCs from diverse countries and industries that had set up R&D centres within the last decade. Individual in-depth interviews probed the MNCs’ views of Korea’s nation brand in regards to their FDI decisions. Recorded interviews were transcribed and analysed for common themes.FindingsFive key thematic attributes of Korea’s nation brand emerged: rigid labour market, pro-FDI government, Chaebols’ dominance, strong nationalism and rapid industrialisation. These attributes relate to NBI’s dimensions of people, governance, investment/immigration, culture/heritage and exports, respectively. The dimensions impacted Korea’s nation brand differently.Originality/valueThis study contributes to nation branding research by applying the Anholt-GfK NBI to empirically investigate nation brand’s influence on attracting business investments at a macro-G2B level. The findings are particularly useful in guiding government policy-makers and trade organisations on running nation-brand promotions and marketing campaigns for FDIs. The findings will also benefit foreign businesses who are considering injecting capital investments into a country.

Diversification strategies and equity market performances

PurposeThis paper aims to investigate the linkages among foreign direct investment (FDI – greenfield and mergers and acquisitions [M&A]) decisions and equity market returns and volatilities. The main premise is that FDI decisions by multinational enterprises (MNE) are influenced by risk and uncertainty indicated by equity market returns and volatilities in the destination (host) countries. This is so because the events on the stock markets in general and their volatilities in particular signal the vitality of the investment climate of the target market. Understanding volatility in capital markets is important for determining the cost of capital and for evaluating direct investment and asset allocation decisions.Design/methodology/approachSurveys and structured interviews were conducted with senior managers of 11 MNEs based in the USA to collect the data used in this study from November 2017 to October 2018. The paper investigates if FDI decisions of the MNE managers are influenced by risk and uncertainty indicated by equity market returns and volatilities. The paper endeavors to make a contribution to the IB literature in highlighting the role played by equity returns and volatilities in FDI decisions and therewith attempts to integrate finance (capital markets) with international business/strategic decision-making.FindingsCapital market performances (returns and volatilities) were found to influence the country choice for location of production facilities (FDI – both greenfield and M&A decisions) as well as timing of the FDI by a MNE. In other words, the share of production capacity optimally located abroad and M&A activities are affected by capital market returns and volatilities.

Do Central and Eastern Europe Countries Play a Role in the Belt and Road Initiative? The Case of Chinese OFDI into the CEE–16 Countries

The main aim of the article was to analyze the motives behind the FDI decisions of Chinese companies’ capital engagement in Central and Eastern Europe. The article examines the applicability of existing theoretical concepts towards Chinese outward foreign direct investment (OFDI). Chinese OFDI patterns have been found to be consistent with Dunning’s investment development path (IDP) theory, but research shows that OFDI to CEE countries is additionally driven by specific motives different than in other regions. The study has proved that one of the major purposes is to get access to the EU common market. Additionally, data analysis has revealed that CEE countries that are not part of the EU attract proportionally more Chinese FDI than those that have easier access to EU funds.

WHAT DRIVES AIRLINES TO MAKE A CROSS-BORDER INVESTMENT? FIRM-LEVEL FACTORS AND INSTITUTIONAL FACTORS

The purpose of this research is to identify the determinants of cross-border investment in the airline industry, focusing on the intangible assets and resources which airlines possess and the institutional differences between home and host countries. The empirical results indicate that airlines have fewer incentives for making foreign investment in other airlines in institutionally different countries and culturally different countries. Furthermore, government restriction on foreign ownership in the host country may discourage airlines to pursue investment in such country. The results weakly support a hypothesis that the more intangible assets airlines possess, the more they may be induced to make FDI. We interpreted the results as follows: the FDI decision of the airline industry may be accounted for by Dunning’s Eclectic Paradigm model just as other industries may be; the institutional difference may have an overwhelming impact on airlines for their FDI decisions; and further studies may be necessary in scrutinizing the role of intangible assets of airlines.

Export versus FDI: Learning through propinquity

This paper considers the strategic role learning plays on the choice between FDI and export under demand and cost uncertainty. FDI allows a foreign firm to learn local demand, which is beneficial. However, as it buys inputs from the same local input markets as the rival home firm, two firms’ costs become perfectly correlated, which we prove harmful to the foreign firm. Thus, the interplay of the demand acquisition and the cost correlation effect affects FDI decisions. We show that FDI is more likely to occur when firms produce more differentiated goods and that FDI almost always reduces host country welfare.

Risk propensity in the foreign direct investment location decision of emerging multinationals

A distinguishing feature of emerging economy multinationals is their apparent tolerance for host country institutional risk. Employing behavioral decision theory and quasi-experimental data, we find that managers’ domestic experience satisfaction increases their relative risk propensity regarding controllable risk (legally protectable loss), but decreases their tendency to accept noncontrollable risk (e.g., political instability). In contrast, firms’ potential slack reduces relative risk propensity regarding controllable risk, yet amplifies the tendency to take noncontrollable risk. We suggest that these counterbalancing effects might help explain prior ambiguous findings on the relationship between experience, slack, and FDI decisions. The study provides a new understanding of why firms exhibit heterogeneous responses to host country risks, and the varying effects of institutions.

FDI Decisions of Chinese Privately-owned Firms: An Institutional Escapism Perspective

Home country governments influence outward foreign direct investment (OFDI) from emerging economies, but how? Governments can intervene actively and deliberately to support OFDI, but firms can also be driven to make OFDI in order to escape from the institutional constraints that result from government intervention. To address this debate on mechanisms, we leverage the difference between privately owned enterprises (POEs) and state-owned enterprises (SOEs) in China. POEs face strong domestic institutional discrimination, while SOEs are favored during times of institutional reform. We show that POEs perceive greater institutional discrimination in provinces with high levels of government intervention, leading to a greater propensity for OFDI. Furthermore, the effect of this perceived discrimination on OFDI is stronger when POEs have greater firm- specific assets, but formal political connections weaken the effect. These results illustrate how theories about the effect of domestic institutional environments on OFDI are conditional upon features such as the types of firms embedded in these institutional environments, among other potential boundary conditions.

FDI decisions and business-group insider control: Evidence from Taiwanese group-affiliated firms investing in the Chinese market

Based on resource-dependence theory, three hypotheses are developed and tested regarding the negative relationship between equity stakes in group-affiliated firms held by business-group headquarters and (1) the slack resources of group-affiliated firms, (2) the products of group-affiliated firms that are similar to those of the business-group headquarters, and (3) the human capital of group-affiliated firms. OLS regressions are used to test the hypotheses on a sample of existing group-affiliates of 218 business-groups entering the China market to establish a new affiliate, including 1015 observations during the 2004–2011 period. This study points to a new avenue for research on international business and business-group literature regarding ownership relations between group-affiliated firms and business-group headquarters.

The Role of Location as a Selection Criterion in FDI: The Case of SMEs in Greece

The study examines the internationalization of Greek SMEs in Western Europe and the Balkan area, focusing on the role of location as a selection criterion in their FDI decisions. Data aimed at capturing SMEs’ perceptions with regard to incentives affecting their FDI based on location criteria. We find that location plays a significant role with regard to the benefits that firms gain, highlighting OLI paradigm's theoretical relevance in the examination of FDI, while presenting internationalization trends in the global environment. Findings further contribute to the adaption of effective practices to enhance firms’ competitiveness through more rational and targeted investment decisions.