For Foreign Direct Investment Research Articles

Corporate taxes and the location of FDI in Europe: The importance of economic integration and project characteristics

European countries face ever-increasing competition for Foreign Direct Investment (FDI). This paper studies how corporate taxes affect the location of FDI in Europe. Using firm-level data, we start by analysing the impact of the level and volatility of three tax rates on FDI: effective, statutory, and marginal tax rates. Next, we investigate how economic and monetary integration influences the effect of taxes on FDI. Finally, we focus on how the impact of taxes varies by project characteristics and sector: expansion versus new investment, industry versus services, high-tech versus low-tech manufacturing industries, and high versus low capital intensity firms. We conclude that stable taxes play a significant role in attracting FDI and, most importantly, that lowering taxes fosters FDI especially when the country has a high tax rate or is outside the euro area. There are some nuances in this relationship that are relevant to policymakers. Tax cuts are particularly important in stimulating foreign firms already in situ to expand their activities and in attracting industrial businesses. Finally, capital-intensive projects are less sensitive to taxes, but high-tech manufacturing projects have the same reaction to tax rates as other manufacturing projects.

FDI, Global Value Chains, and Local Sourcing in Developing Countries

The local sourcing of intermediate products is one the main channels for foreign direct investment (FDI) spillovers. This paper investigates whether and how participation and positioning in the global value chains (GVCs) of host countries is associated to local sourcing by foreign investors. Matching two firm-level data sets of 19 Sub-Saharan African countries and Vietnam to country-sector level measures of GVC involvement, we find that more intense GVC participation and upstream specialization are associated to a higher share of inputs sourced locally by foreign investors. These effects are larger in countries with stronger rule of law and better education.

FDI, Global Value Chains, and Local Sourcing in Developing Countries

The local sourcing of intermediate products is one the main channels for foreign direct investment (FDI) spillovers. This paper investigates whether and how participation and positioning in the global value chains (GVCs) of host countries is associated to local sourcing by foreign investors. Matching two firm-level data sets of 19 Sub-Saharan African countries and Vietnam to country-sector level measures of GVC involvement, we find that more intense GVC participation and upstream specialization are associated to a higher share of inputs sourced locally by foreign investors. These effects are larger in countries with stronger rule of law and better education.

A Multidimensional Approach to International Market Selection and Nation Branding in Sub-saharan Africa

Despite the strong economic growth of many African countries, foreign investors often overlook their potential. Nation branding can raise the awareness of foreign investors to the particular strengths of these countries. To identify the specific image attributes of a nation that nation branding campaigns could prioritize, 144 managers evaluated the importance of 22 market selection criteria. In this study, using the analytical hierarchy process, we weighed those dimensions, condensing multifaceted information into a framework to evaluate the attractiveness of African countries for foreign direct investment (FDI). We subsequently applied this framework to 46 sub-Saharan nations. The results highlight the diversity among these countries, provide guidance for nation branding and serve to alert investors to frequently overlooked target markets. Our study substantially contributes to international market selection research by introducing a new screening method for emerging markets.

Escape FDI and the Varieties of Capitalism: Why History Matters in International Business

This paper addresses the need for a stronger perspective of history in International Business research. In order to illustrate this matter, we will discuss the topic of ‘escape FDI’ as a motive for foreign direct investments (FDIs). While prior research suggests a connection between ‘escape FDI’ and an economy’s degree of societal coordination in a quasi-ahistorical manner, we will argue that ‘escape FDI’ is an issue that liberal and coordinated market economies alike have witnessed. In fact, the relevance of simple dichotomies, such as coordinated and liberal economies, seems to break down in the face of shifting institutional conditions that are bound to very specific periods. Quite consciously, the present paper combines social science and historical methodologies, in an effort to produce a synthesis that will benefit both approaches to understanding international business and its larger context.

A new theoretical framework to assess Multinational Corporations’ motivation for Foreign Direct Investment: A case study on Vietnamese service industries

PurposeThis paper develops a new theoretical framework, based on eclectic paradigm and institution theory, to evaluate Multinational Corporations’ (MNCs’) incentives for Foreign Direct Investment (FDI). The new framework is applied as a case study in the service sector across Vietnam. Design/methodology/approachThis study applies the Structural Equation Modelling (SEM) approach to investigate the motivational factors of MNCs by using primary data on MNCs working in service industries in Vietnam. This paper introduces five motivational factors, and conducts a Confirmatory Factor Analysis (CFA) to study the construct validity of the research measures and to cluster the variables into common factors that can be used to present relationships among sets of interrelated variables. FindingsThe SEM results reveal that the key determinants of MNCs’ incentives to invest in service industries are market-seeking government policies and culture, all of which have significantly contributed to FDI. Originality/valueThis study offers new knowledge and insights into the factors that motivate FDI by MNCs in general and in service industries in Vietnam. The findings are plausible and in line with the recent economic reforms launched in Vietnam, along with the increased FDI inflows into the country in the last twenty-five years.

Ralls and National Security Review of Foreign Investments

With its enormous open market, the United States has long been a magnet for foreign direct investments (FDI). Historically, most of the FDI originated from U.S. allies such as the U.K. and Canada and posed minimal threat to U.S. national security. In the past decade, however, surging FDI from non-allies elevated the tensions between safeguarding U.S. national security and preserving a free and open investment market. In response, Congress reformed the review process by Committee on Foreign Investment in the United States (CFIUS) to enhance the scrutiny of FDI and congressional oversight. The agency enjoys broad discretion and its review is shrouded in secrecy. Yet given the national security nature of the regime, no foreign investor had ever challenged the agency until 2013, when a Chinese-invested company filed a federal lawsuit against CFIUS alleging, among others, violations of its constitutional right to due process. Few thought the plaintiff had more than a minimal chance of winning, and the trial court indeed ruled in favor of the government. Yet to the surprise of most experts, the DC Circuit reversed the lower court’s decision and held the CFIUS’s action unconstitutional. As the first and only lawsuit against CFIUS in the agency’s entire history, the case (Ralls v. CFIUS) has caught a great deal of attention and generated heated debates. But to date the debates have mostly centered on the legal merits of the case. Few have analyzed the key assumptions underlying the trial court ruling and the critiques of the appellate ruling, let alone the practical impacts of the case. This article narrows the gaps by empirically exploring the following three questions. One, is the assumption valid that foreign investors with complete information assume the risk of presidential veto by skipping the notification to CFIUS prior to their acquisition of U.S. assets? The trial judge and most CFIUS experts have adopted, consciously or not, that assumption, so has the agency itself. However, as will be demonstrated below, the assumption lacks empirical support. Two, has the DC Circuit ruling any significant practical effects on how foreign investors cope with the CFIUS regime, as some critiques have predicted? According to the empirical analysis, Ralls has at most a temporary effect on foreign investors’ perception of CFIUS review. Third, how do foreign investors view and respond to the regime in general? The article presents preliminary evidence that the investors’ actions reflect salient legal issues of the CFIUS law. The findings have important policy and theoretical implications.

Ralls and National Security Review of Foreign Investments

With its enormous open market, the United States has long been a magnet for foreign direct investments (FDI). Historically, most of the FDI originated from U.S. allies such as the U.K. and Canada and posed minimal threat to U.S. national security. In the past decade, however, surging FDI from non-allies elevated the tensions between safeguarding U.S. national security and preserving a free and open investment market. In response, Congress reformed the review process by Committee on Foreign Investment in the United States (CFIUS) to enhance the scrutiny of FDI and congressional oversight. The agency enjoys broad discretion and its review is shrouded in secrecy. Yet given the national security nature of the regime, no foreign investor had ever challenged the agency until 2013, when a Chinese-invested company filed a federal lawsuit against CFIUS alleging, among others, violations of its constitutional right to due process. Few thought the plaintiff had more than a minimal chance of winning, and the trial court indeed ruled in favor of the government. Yet to the surprise of most experts, the DC Circuit reversed the lower court’s decision and held the CFIUS’s action unconstitutional. As the first and only lawsuit against CFIUS in the agency’s entire history, the case (Ralls v. CFIUS) has caught a great deal of attention and generated heated debates. But to date the debates have mostly centered on the legal merits of the case. Few have analyzed the key assumptions underlying the trial court ruling and the critiques of the appellate ruling, let alone the practical impacts of the case. This article narrows the gaps by empirically exploring the following three questions. One, is the assumption valid that foreign investors with complete information assume the risk of presidential veto by skipping the notification to CFIUS prior to their acquisition of U.S. assets? The trial judge and most CFIUS experts have adopted, consciously or not, that assumption, so has the agency itself. However, as will be demonstrated below, the assumption lacks empirical support. Two, has the DC Circuit ruling any significant practical effects on how foreign investors cope with the CFIUS regime, as some critiques have predicted? According to the empirical analysis, Ralls has at most a temporary effect on foreign investors’ perception of CFIUS review. Third, how do foreign investors view and respond to the regime in general? The article presents preliminary evidence that the investors’ actions reflect salient legal issues of the CFIUS law. The findings have important policy and theoretical implications.

Vietnam Inbound M&A Activity: The Role of Government Policy and Regulatory Environment

With a robust recent history of reform and opening, joining of the World Trade Organization, and negotiating a myriad of regional and global trade agreements, Vietnam has emerged as a promising destination for foreign direct investment (FDI) and cross-border mergers and acquisitions (M&A). In this paper, we provide an overview of Vietnam’s inbound mergers and acquisitions and review the two main driving forces of inbound M&A, which are the legal framework reform process and the equitization of State-owned enterprises. We close by providing directions for future research in the area of cross-border M&As.

Tax competition for foreign direct investments and the nature of the incumbent firm

We investigate tax/subsidy competition for foreign direct investments (FDI) between countries of different size when a domestic firm is the incumbent in the largest market and we study how the nature (public or private) of the incumbent firm affects policy competition. We show that, differently from the case of a private firm, the country hosting the incumbent always benefits from FDI if the domestic firm is a public welfare‐maximizing firm. We also show that the public firm acts as a disciplinary device for the foreign multinational that will always choose the efficient welfare‐maximizing location. An efficiency‐enhancing role of policy competition may then arise only when the domestic incumbent is a private firm, whereas tax competition is always wasteful in the presence of a public firm.

A new era for foreign direct investment?

PurposeThe paper aims to provide an updated broad assessment of the environment for foreign direct investment (FDI) in light of the referendum vote in the UK to exit the European Union (Brexit), the election of Donald Trump as President of the USA and growing nationalist movements in Europe.Design/methodology/approachThe paper uses an essay format to set out the main issues linking recent political developments to FDI. It reviews some relevant empirical literature to assess the identified linkages.FindingsIt seems reasonable to argue that there will be a reduction in FDI intensity on a global basis over the foreseeable future. It is also likely that the nature of FDI will move more toward being a substitute rather than a complement to trade.Originality/valueThe essay is original and valuable in the sense of offering a contemporary assessment of how important the recent political events may affect the FDI process.

FDI location choice: the role of locational ambidexterity

PurposeThis paper proposes locational ambidexterity as a location-specific factor based on an operation flexibility perspective, and explores why and how multinational corporations (MNCs) proactively deal with uncertainty by valuing locational ambidexterity in making location decisions.Design/methodology/approachLocation choice data for foreign direct investment (FDI) at a sub-national level in China is used to test the role of locational ambidexterity.FindingsWe find that FDI generally prefers locations with high ambidexterity. Moreover, investments from a heterogeneous country context are more sensitive to locational ambidexterity than those from a similar country context. However, there is no significant evidence that wholly owned investments favor locational ambidexterity more than do international joint ventures.Research limitations/implicationsAn alternative operationalization of locational ambidexterity may be needed. Future research could explore the sources of locational ambidexterity, identify other firm- and industry-level factors that could alter the value of ambidexterity, investigate how MNCs integrate locational ambidexterity into organization-specific option creation strategies and test the ambidexterity perspective with micro-level location choice data.Practical implicationsLocational ambidexterity may reduce the overall risk and adjustment cost of future changes. FDI may choose a location with high ambidexterity, i.e. a balanced portfolio of location-specific determinants, under uncertainty about the future.Originality/valueDrawing on the notion of location flexibility from Buckley and Casson (1998), this study identifies a new location character, locational ambidexterity, and proposes that MNCs address uncertainty by choosing ambidextrous locations that offer more flexibility for MNCs to change or respond to potential volatility. Selecting locations with high ambidexterity is thus an alternative and complement to the organization-specific flexibility creation strategies suggested by the literature on real option and flexibility.

FDI, Global Value Chains, and Local Sourcing in Developing Countries

The local sourcing of intermediate products is one the main channels for foreign direct investment (FDI) spillovers. This paper investigates whether and how participation and positioning in the global value chains (GVCs) of host countries is associated to local sourcing by foreign investors. Matching two firm-level data sets of 19 Sub-Saharan African countries and Vietnam to country-sector level measures of GVC involvement, we find that more intense GVC participation and upstream specialization are associated to a higher share of inputs sourced locally by foreign investors. These effects are larger in countries with stronger rule of law and better education.

Foreign‐to‐domestic labour mobility in Sweden

AbstractThis exploratory study examines foreign‐to‐domestic labour mobility in Sweden with focus on the magnitude and features of potential spillover agents and the importance of the observed labour mobility flows in a spatial context. Although the study does not provide any definite conclusion on whether there exist spillover effects from labour mobility, it demonstrates that there is a non‐trivial magnitude of labour mobility that can result in some form of indirect knowledge or technology transfer from parents to affiliates, and subsequently from affiliates to the local economy. Labour mobility may thus be an important channel for foreign direct investment (FDI) spillovers in Sweden. However, the study also shows that it is unlikely that spillovers from labour mobility will occur in many of the 72 local labour market regions because of absent or very small labour mobility flows. Rather, much the observed labour mobility flows create potentials for FDI spillovers in a few larger regions. This suggests that indirect benefits from FDI can be conditional to a particular spatial context, which poses both challenges and opportunities for planners and policy‐makers that seek to promote regional economic development through inward FDI.

Do Foreign Investors’ Location Determinants in Service Functions Differ According to Sectors? An Empirical Analysis of EU for 1997 to 2011

European Union (EU) is very attractive for foreign direct investment (FDI) in services and policy makers should know the reasons explaining investment location choices of foreign firms in order to attract them. This article explores FDI location determinants in service functions in the EU-28. Studies dealing with such an issue stay generally focused on the location of service functions in the manufacturing sector. Our assumption is that the location determinants of service functions may differ according to sectors. So, we propose to study whether the location pattern of some service functions is sector independent, whereas it is sector dependent for other service functions. Using a database developed by Ernst and Young, we estimate mixed logit models on foreign firms’ location choices. Our contribution is to consider simultaneously three sectors and eight service functions for 271 European regions, during the period 1997 to 2011. Our fundamental findings are that service functions location choices are different according to sectors and that location determinants vary according to the service function considered. The only variables significant for all service functions are agglomeration variables. However, our contribution is to distinguish between different types of agglomeration (regional, sectorial, functional, and group agglomeration) and to show that some agglomeration variables act differently according to service functions.

Comment on “Infrastructure and Connectivity in India: Getting the Basics Right”

Singh and Kathuria (2016) give a good overview of India's infrastructure challenges by describing how inefficient and costly its infrastructure services are in India. The authors also give clues for addressing those challenges and attempt to show ways to realize the potential of connectivity in facilitating economic integration within India as well as with other developing economies in Asia. While appreciating the paper's findings, I would like to contribute to the discussion by referring to some missing elements from a practitioner's perspective. My first point is related to the implications of connectivity. As is rightly recognized, poor and high cost infrastructure services remain one of the most serious impediments to India's participation in global supply chains and its attractiveness as a destination for foreign direct investment (FDI). Therefore, bridging connectivity gaps and reducing cross-border logistics costs could be a necessary condition. But it is not necessarily a sufficient condition for positive gains for Indian producers and exporters. The poor infrastructure adversely affects the competitiveness of domestic firms through high transport costs effectively imposed as “a tax on exports.” On the other hand, export-oriented sectors in major trading partners could gain from India's large domestic markets. In fact, according to the Ministry of Commerce and Industry India's imports from ASEAN were $45 billion, while its exports remained at $32 billion in 2014/15. The merchandise trade deficit has tended to widen in ASEAN's favor. I would like to know how to reduce India's high domestic logistics costs because of its highly fragmented governance structure. Another question is how the services sector's strength and potential could give India a chance to enhance its trading opportunities despite the emerging constraints on information and communications technology (ICT) connectivity. Better connectivity could expand India's trade gains only when India's competitive disadvantages are corrected and advantages are maximized. My second point is on the efficiency and effectiveness of infrastructure. Policy makers should focus more on the efficiency and effectiveness of network infrastructure. We should avoid just cheerleading the huge demand for infrastructure investment and financing. Instead, we should shed light on the ways to allocate limited resources among priority areas with maximum efficiency and effectiveness to address India's pressing needs. One of the striking facts is that the share of road transport in freight traffic in India is almost twice that of the United States, while only 2% of the total road length carries 40% of all road traffic (National Transport Development Policy Committee, NTDPC, February 2016). Inefficiency is caused by an overemphasis on road development with the resulting modal share increasingly skewed towards roads. The diversion of freight and passenger traffic to roads from railways gives rise to larger freight and environmental costs. My third point is on the financing options and limits to public–private partnerships (PPPs). Infrastructure financing poses a major risk to the soundness of commercial banks. The growing trend of stressed assets mainly from PPP infrastructure projects has reached a critical point with the non-performing asset ratio at over 20%. Takeout financing could be a remedy, but shifting from bank financing to bond financing should be a fundamental cure. In this context, bond market development and a mechanism to connect banking with bond markets are two of the priority policy challenges. Should project bond markets be in place, credit enhancement could temporarily help mobilize insurance and pension funds for infrastructure financing with a resulting risk transfer from such funds to guarantors. Municipal bond markets also have a potential. However, the cases such as revenue bonds issued by local governments in the United States relied heavily on the credit enhancement provided by monoline insurers which became marginalized after the Global Financial Crisis in the mid-2000s. The fundamental constraints are the limited supply of bankable infrastructure projects. Effective utilization of private sources of finance for infrastructure development depends on the commercial viability of projects. As Singh and Kathuria suggest, both “fair return to private investment” and “protection of consumer interest, including safety and affordability” are the key ingredients for successful PPPs. But balancing both is not an easy task, particularly given India's socio-economic environments. We should note that the inherent conflict between the public and private sector priorities as well as the inevitable contingencies could entail risks for the government to eventually assume an excessive fiscal burden through subsidies or in the form of contingent liabilities (Nishizawa, 2011). In essence, the cost of building, operating, and maintaining infrastructure facilities eventually has to be either paid for by the users or charged to taxpayers. Commercial banks are now paying the cost of excessive risk taking on less-bankable projects at best. I agree with Singh and Kathuria's emphasis on the importance of both hard and soft infrastructure for enhancing trade flows and growth.

Double-edged incentive competition for foreign direct investment

This paper studies the impact of special interest lobbying on competition for foreign direct investment (FDI) in a common agency framework. We argue that special interest lobbying may provide an extra political incentive for governments to attract FDI. We show that compared with the benchmark case where governments maximize national welfare, now (1) an economically disadvantageous country has a chance to win FDI competition; (2) the equilibrium subsidy for attracting FDI is higher than in the benchmark case; (3) allocative efficiency cannot be always achieved.

Brexit and FDI

The potential for a departure from the EU to undermine the UK's attractiveness as a location for Foreign Direct Investment (FDI) is often cited as one of the key risks were the UK to leave the EU. In weighing up the threat to FDI posed by ‘Brexit’ we assess the net gain from inward investment and the role played by EU membership in attracting FDI. In theory, FDI benefits the economy via lower interest rates, higher wages for workers and ‘spillover’ benefits boosting economy‐wide productivity. But the evidence for these benefits is ambiguous. And FDI has potential drawbacks. These include an adverse effect on the tradeable sector, reflected in a wider current account deficit, the potential to ‘crowd out’ investment by domestic firms and the fiscal cost of subsidies paid to inward investors. That almost half of FDI in the UK comes from other EU countries suggests that EU membership is not the only driver of foreign investment in the UK. Other factors include the UK's business friendly environment, as reflected in global competitiveness surveys, and a relatively deregulated labour market. Of perhaps most importance is the lure provided by the UK's large domestic economy. 80% of FDI in the UK is in sectors where sales to the EU account for less than 10% of total demand. However, FDI in manufacturing does look vulnerable to Brexit, given the importance of the EU market. Granted, manufacturing accounts for a modest share of UK FDI. But to the extent that FDI boosts productivity, a loss of inward investment in this sector is likely to come at a disproportionate cost. Our modelling suggests that in a worst case Brexit scenario, the stock of FDI could ultimately be 7% lower relative to the UK remaining in the EU, potentially knocking around ½% off the level of GDP.

Problems of Regional Development in Contemporary Slovak Society

The issue of regional development is among the most serious problems of contemporary Slovak society. Slovakia is characterized by significant regional differences, so this issue gets to the forefront not only in the plane of politics and the search for possible solutions, but also as a professional problem. This problem cannot be solved only by mobilizing local resources. Neither government subsidies cannot raise lagging regions to the desired level. Not many region in Slovakia, which may develop without direct foreign investment. It is the result of centrally planned economy with whom faced virtually all transition countries. These are primary reasons, for which demand for foreign direct investment (FDI) far exceeds supply. Mentioned problem was discussed in work. The objective is based on theoretical and practical knowledge recommend further development opportunities of the region, summarize all factors, that are active in the process of regional development, specifically the determining of regional marketing objectives, which can only be achieved by using marketing tools. DOI: 10.5901/mjss.2016.v7n1s1p327

Does location choice affect foreign subsidiary success in India? An empirical study based on Porter's diamond model

Since India began to liberalise its economy in 1991, the country has become increasingly attractive as a location for foreign direct investment (FDI). However, FDI is distributed very unevenly across the country. While, for example, the state of Maharashtra accounts for 34% of all FDI inflows into India, other states like Assam with 0.1% hardly attract any FDI. The differences are even larger when considering FDI disparities on a district level. Despite this imbalance, academic studies on location factors driving FDI success are lacking. In this study we investigate the factors that determine the degree of subsidiary success in India. Based on Porter's diamond model we develop five hypotheses and test them against a sample of 113 foreign firms. Our data show that subsidiary success is predominantly determined by the availability of human capital. A significant influence is also revealed for the level of governmental regulations and the availability of suppliers. Conclusions are drawn for management and policy makers as well as for theory building.