FDI Decisions Research Articles

Context, law and reinvestment decisions: Why the transitional periphery differs from other post-state socialist economies

A range of studies has found that corruption has a significant impact upon FDI decisions, however to date there has been scant investigation into longer term investments made by firms and their relative proclivity to reinvest. Further, there is particularly little work on reinvestment choices made on the transitional periphery of post-state socialist countries and how these might differ from the more stable transitional economies of central and Eastern Europe. Utilising 2005 World Bank Enterprise Survey data, this study explores the relationship between corruption and MNEs’ strategic decision to reinvest profits. From an institutionalist starting point, we find variation in the impact of different dimensions of corruption upon reinvestment; pervasive corruption impacts negatively upon reinvestment, but its effects are more pronounced in the transitional periphery. Perceived robust legal institutions have a positive correlation with reinvestment, but again, the positive effects are less pronounced on the transitional peripheral state socialist states. We ascribe this disparity to greater institutional fluidity, and explore why this context has particularly adverse effects. Finally, we find that firm level attributes of larger size and greater age play an important role in positive reinvestment decisions, appearing to mitigate the worst consequences of this fluidity.

Firm Heterogeneity and FDI in Distribution Services

AbstractDistribution services play a large role in intermediating production and consumption across borders. Using firm‐level data on Japanese multinationals in wholesale and retail sectors, this study examines FDI decisions of distribution firms for local distribution services at the extensive and intensive margin. Consistent with the model of heterogeneous firms on multinational production, I find that more productive multinationals are more likely than less productive multinationals to enter a larger number of markets, to penetrate less attractive markets and to generate larger sales per each market. While these findings are consistent with previous evidence on manufacturing multinationals, I find some distinctive determinants of FDI in distribution services.

What drives emerging-economy outbound FDI decisions to obtain strategic assets?

Emerging-economy enterprises (EEEs) engage in strategic asset-seeking FDI (SAS FDI) for different reasons than traditional FDI. Previous studies suggest that a firm’s internal learning capability (absorptive capacity) and increased foreign competition (industry openness) might play a role in encouraging SAS FDI. Our study of recent Chinese outbound FDI projects confirms that increased absorptive capacity and increased industry openness make EEEs more likely to engage in SAS FDI. However, there is also a negative interaction effect, suggesting that knowledge spillovers from technology imports make EEEs somewhat less likely to engage in SAS FDI overseas.

Assessing the future of a CSP industry in Morocco

This article presents the results of a survey on the feasibility of, and difficulties in, establishing a locally CSP manufacturing industry in Morocco. First, the survey explores which specific components of the CSP production chain could be manufactured in Morocco today and which would require moderate or significant changes being made in that country over the next decade. This paper contributes to demonstrating the potential for a CSP manufacturing industry in Morocco at the present time, ideal business models and current restrictions. Second, on the one hand this survey provides insight into the entrepreneurial, policy- and market-related barriers hampering the development of this industry and, on the other, the relative advantages offered by Morocco for the development of a CSP sector. Complementing the empirical findings on foreign direct investment determinants, this exercise stresses the key relevance of the economic context not only in terms of size, stability and predictability of the market, but also in regard to the critical importance of institutional and policy-related issues such as stability and public policy commitment. The results show that prior experience of firms in developing areas is a crucial issue in the accurate assessment of the risks and benefits associated with FDI decisions.

How Far Away is an Intangible? Services FDI and Distance

AbstractForeign direct investment (FDI) in services has grown significantly in recent years. Evidence of spatial relationships in FDI decisions have been provided for goods manufacturing by utilising physical distance‐based measures of trade costs. This paper investigates spatial interactions for services FDI using several distance measures, including physical distance, genetic distance and transport time. Across different measures of distance, the traditional determinants of outbound FDI activity remain valid for services. We also find spatial interdependence for services FDI that is generally supportive of export‐platform FDI.

Labor Taxation and FDI Decisions in the European Union

This paper uses panel data on bilateral FDI stocks in the European Union to empirically analyze the impact of labor and corporate taxations on FDI decisions. While the effect of corporate taxes on FDI is well documented, the impact of labor taxes on FDI has barely been explored. This is surprising since labor taxation may influence FDI as well; the taxation of labor affects the production cost and the ability to attract and retain productive labor, and thereby it also, ultimately, impacts the return to the investment. By employing a Heckman two-step estimation model, which controls for possible sample selection bias due to many zero bilateral observations, we find that labor taxes do influence FDI decisions.

The Effect of Institutional Distance on FDI Strategies: Co-integration and Decomposition Effects

Research on institution suggests that different institutions influence a firm’s foreign investment decision. However, FDI decisions are not homogeneous across all investment decision making stages, but rather they represent a set of sequential decisions. In addition, institutional distance (between home and host countries) has unique influences in different decision stages. By integrating regulatory, cognitive/cultural, and normative institutional distance and decomposing FDI decisions, our research suggests that the co-integration of institutions and decomposition of FDI strategies help us have a better understanding of the sequential decision making process. Specifically, regulatory institutional distance influences the decision of whether MNEs will invest in the host countries (the when question); cognitive/cultural institutional distance affects the decision of whether MNEs will build local partnerships (the who question); and normative institutional distance determines whether MNEs want to invest with majority or minority ownership (the how question). Importantly, we find the effects of institutional distance persist: regulatory, cognitive/cultural, and normative institutions dominantly influence the sequential investment decisions in configurational and composite manners.

The role of organisational politics in foreign direct investment

This paper aims to show that FDI decisions are largely political decisions made by organisational members and affected by contextual factors and the nature of the organisation’s power relationships. Furthermore, the study explores the uses of management accounting information in the FDI process. The current paper is a case study of the decision making process of a Greek manufacturing company which invested in the Balkans during the 1990s. The organisational control mix initially focused to explicit references to the company’s ideology but developed to one using formal, financially quantifiable information. The analysis illustrates that conflict and political behaviour emerge during strategic decision-making tasks in response to changing environmental conditions. The paper concludes that the change of the business affected by the FDI increased the influence of both the formal management control systems and those who controlled them.

Risk and the technology content of FDI: A dynamic model

This paper incorporates risk into the FDI decisions of firms. The risk of FDI failure increases with the gap between the South's technology frontier and the technology complexity of a firm's product. This leads to a double-crossing sorting pattern of FDI—firms of intermediate technology levels are more likely than others to undertake FDI. It is with the attempt to relax the upper bound of the technology content of FDI, we argue, that many FDI policies are created. The theory's predictions are consistent with the empirical patterns of FDI in China by US and Taiwanese manufacturing firms.

Capital endowment, credit constraint and FDI: Analysis based on heterogeneous firms

To examine the impact of capital endowment and credit constraint on firms’ FDI decisions, we build a model of investment portfolio based on heterogeneous firms setup. We find that financial factors matter for firms’ internationalization. More capital endowment or less credit constraint lowers cutoff productivity for firms to do FDI.

Corporate tax harmonization in the EU

This paper explores the economic consequences of proposed EU reforms for a common consolidated corporate tax base. The reforms replace separate accounting with formula apportionment as a way to allocate corporate tax bases across countries. To assess the economic implications, we use a numerical computable general equilibrium (CGE) model for Europe. It encompasses several decision margins of firms such as marginal investment, FDI decisions, and multinational profit shifting. The simulations suggest that consolidation does not yield substantial welfare gains for Europe. The variation of effects across countries is large and depends on the choice of the apportionment formula. Consolidation with formula apportionment does not weaken incentives for tax competition. Tax competition instead offers a rationale for rate harmonization, in addition to base harmonization.

Do the third‐country effect and economic integration matter for Intra‐ASEAN FDI?

PurposeThe purpose of this paper is to explore theoretical predictions and empirical investigation with respect to bilateral and third‐country determinants of Intra‐Association of Southeast Asian Nations Foreign Direct Investment (ASEAN FDI).Design/methodology/approachTheoretically, the augmented knowledge‐capital model of Baltagi et al. is refined by additionally assuming the presence of tariffs and economic integration. Subsequently, the theoretical predictions are hypothesized to be driven by numerical simulation of a derived general equilibrium model. Afterwards, bilateral and third‐country characteristics and economic integration influencing FDI in ASEAN are investigated using a spatial panel data technique, namely maximum likelihood estimator.FindingsUsing data on ASEAN inward FDI stock over the period of 1995‐2006, the results indicate that third‐country effect and economic integration are significant determinants of Intra‐ASEAN FDI. In addition, vertical FDI is proved to be the most effective investment strategy.Practical implicationsSome policy implications of investment policy and legislation in ASEAN economies are also provided. It is suggested that ASEAN investment policies should pay attention to how to enhance vertical FDI rather than the others.Originality/valueThe paper is useful to advance the theory of multinational enterprises. It assists Intra‐ASEAN investors for tracking FDI and location decisions in ASEAN countries.

FDI of German Companies During Globalization and Deglobalization

Based on micro-level data of German companies from 1873 to 1927, we identified horizontal and vertical FDI applying a Knowledge-Capital model and analyzed individual FDI decisions. Our KC model revealed that market-driven FDI predominated; however, wage gaps and differences in human capital stimulated cost-driven FDI flows, which accounted for up to 10% of total FDI. On an individual level, large companies with high profitability conducted more FDI. Higher tariffs after WWI enhanced FDI, as companies could circumvent trade barriers—but declining openness reduced FDI. In spite of disintegration after WWI, the propensity to invest increased due to higher market concentration and firm specific investment patterns—albeit industry agglomeration effects were of minor importance.

Toward More Effective Research on the Multinationality-Performance Relationship

This paper revisits the mainstream academic perspective on the relationship between multinationality and performance (MP). We argue that most, if not all, past empirical work on this international management topic is flawed from a conceptual perspective since there is no valid theoretical rationale that would predict a generalizable MP relationship. We suggest that useful empirical work on the MP linkage requires prior analysis of the key parameters underlying the substance of the multinationality concept in specific empirical settings. We revisit the MP relationship, and elaborate on three key parameters underlying the substance of the multinationality concept: Variety of strategic motivations for FDI, environmental complexity resulting from bundles of discrete FDI decisions, and organizational complexity.

Ideology vs. Formal Systems as a Control Mechanism: A Case Study

This paper applies Pettigrew's 'context, content, process' model to evaluate, using a case study approach, the use of management control systems (MCS) for FDI decisions. The organisational control mix included both formal, financially quantifiable information and explicit references to the company's ideology. The context of our study is the external and internal environment of the FDI of a Greek manufacturing company which invested in the Balkans during the 1990s. The company is characterized by a very powerful CEO, who is also the majority shareholder, and an innovation and quality ideology. The content of the change is the FDI itself while the process refers to the usage of MCS in the organizational environment. The analysis illustrates that conflict and political behaviour emerge during strategic decision-making tasks in response to changing environmental conditions; sectarian demands are generated during those decision processes and power is mobilized through the control of resources and references to the company ideology. Dominant actor groups try to bring about their favourite decision outcomes, by affecting other participants' perceptions with reference to the company ideology. The paper concludes that the change of the business affected by the FDI increased the influence of both the formal MCS and those who controlled them.

FDI AND DOMESTIC INVESTMENT IN TAIWAN: AN ENDOGENOUS SWITCHING MODEL

The purpose of this paper is to examine the effect of the FDI decision on domestic investment in the case of Taiwanese manufacturing firms. In addition, we also consider the deferral effect of the FDI decision and the role of firm size. To this end, this paper takes advantage of an endogenous switching model from which consistent estimators are obtained after correcting for the self‐selection problem. The empirical results show that the effect of these manufacturing firms’ FDI decisions on domestic investment is significant within the firms. Furthermore, a crowding‐out effect of FDI on domestic investment is found when Taiwanese firms engage in defensive FDI. Finally, FDI is found to have a positive influence on the domestic investment of the larger firms, while the influence is negative in the case of the smaller firms.

The Effect of Capital Controlson Foreign Direct Investment Decisions Under Country Risk with Intangible Assets

This paper examines how capital controls affect FDI decisions and how the impact of these restrictive measures varies with different levels of country risk. We construct a model of firms' FDI decisions, broadly in Dunning's eclectic theory framework, using real options to emphasize economic uncertainty and country risk. Numerical results of the model take the form of quality statistics that uncover the underlying dynamics hidden in the aggregate data that is responsible for the low performance of recent empirical studies. We find that increasing levels of capital controls reduce the life-span of FDI investments at each level of country risk and foreign investors' willingness towards risk sharing increases. We reveal a significant interaction between capital control and country risk, resulting in a nonlinear relationship between these and the volatility and volume statistics. We estimate a standard cross-sectional model that provides strong support for our theoretical findings.

The Effect of Capital Controls on Foreign Direct Investment Decisions Under Country Risk With Intangible Assets

This paper examines how capital controls affect FDI decisions and how the impact of these restrictive measures varies with different levels of country risk. We construct a model of firms' FDI decisions, broadly in Dunning's eclectic theory framework, using real options to emphasize economic uncertainty and country risk. Numerical results of the model take the form of quality statistics that uncover the underlying dynamics hidden in the aggregate data that is responsible for the low performance of recent empirical studies. We find that increasing levels of capital controls reduce the life-span of FDI investments at each level of country risk and foreign investors' willingness towards risk sharing increases. We reveal a significant interaction between capital control and country risk, resulting in a nonlinear relationship between these and the volatility and volume statistics. We estimate a standard cross-sectional model that provides strong support for our theoretical findings.

Emotions and foreign direct investment: A theoretical and empirical exploration

Abstract * Emotions are largely absent in economic models. Possibly for this reason, many theories fail to explain the actual decisions made by managers. * Therefore, we integrate emotions with regular microeconomic theory. We focus on FDI decisions, and include both economic and emotional variables in our analysis of the firm's decision-making process. * In our theoretical analysis, emotions are included in a utility maximization model that considers not only the utility of the firm but also the utility of the individual decision-maker. * In our empirical analysis, the presence of emotions in FDI decision-making is tested using a sample of Dutch enterprises that considered an investment in Central or Eastern Europe between 1990 and 2000. Key Results * The empirical results show that emotions are important in economic decisionmaking. The presence of positive emotions increases the chance of Dutch firms to engage in an FDI in Central and Eastern Europe. Introduction Unlike Dr Spock cruising the Galaxy in his Voyager, most humans are not stripped of their emotions when making decisions. But equally most humans do not possess Dr. Spock's information processing capacities when making choices (Earl 2001). This is nevertheless how economic analysis models human decisions. Standard rational choice models and the bulk of empirical studies on microeconomic choice behavior use a rational choice model wherein little room is left for emotions to play a role, let alone a decisive one. The skills required to select and to handle the information that is needed to guarantee the rationality of the choice, are assumed to be abundantly available among human decision-makers. This assumption is not different in the study of foreign direct investment (FDI-) decisions. The complicated processes leading to a decision either to invest or not and where to invest (geographically) are notoriously difficult to model and the last thing that we need is more complication in terms of emotions playing a role. Direct investment-decisions are assumed to be based on estimates of the Net Present Values of all investment options and the final decision on whether or not to proceed with the investment in a particular country is assumed to be based on the ranking of all options (including the negative ones of not to invest) in terms of their estimated Net Present Value. When preparing a survey on investment-decisions of Dutch firms in Central and Eastern Europe and Central Asia. In open interviews with investors we explored the many reasons that might have played a role during open interviews with investors. During these discussions, approximately half of the respondents implied that "emotional" elements played a role in making final choices both regarding the decision to invest and the final choice of the country. Considerations such as the fact that the manager had participated in an exchange program during his/her study in that specific country, the fact that the partner of (one of) the owner(s) holds citizenship of the host country or that a personal acquaintance asked the Dutch firm to take over the foreign business, were among the important factors quoted to have been decisive elements in the decision process. These considerations seem far away from the algorithms of pure rational choice, but the question is whether they are. In this paper we explore theoretically how emotions can be seen as complements to rational choice processes and illustrate empirically that emotional factors do play a role in foreign direct investment-decisions. The second section includes a description of the economic decision-making literature including emotions and a frame that can be used to include emotions in investment-decisions. In section three a simple utility maximizing decision-making model will be described, with the specifications on how to include emotions. Section four provides empirical evidence that emotions are an influencing factor in the FDI-decision-making process, using the data from a survey among Dutch enterprises considering a foreign direct investment in Central and Eastern Europe. …

Internalization and Internationalization Under Copeting Real Options

The theories of internalization and internationalization provide general factors of international market entry but are not precise about its timing. A model of waiting and growth options seizes the importance of flexibility to FDI decisions and centers the impact of uncertainty. The results of a panel study using aggregates of 5379 German entries to 22 countries suggest that uncertainty has a U-shaped influence on the probability of entry and a negative effect on the amount of capital whereas it leaves the share in capital unaffected. Investors seem to treat foreign subsidiaries as real options on internationalization but not on internalization.