Foreign Direct Investment Decisions Research Articles

Quantifying adaptation costs in sequential FDI location choices: Evidence from German firms

Initiating foreign direct investment (FDI) is expensive for multinational firms due to the need to adapt to new business practices, ethical norms, and regulations in a foreign country. This paper examines how such adaptation costs affect firms' FDI decisions in current and subsequent periods. We develop a dynamic structural model of how firms make sequential decisions regarding where to invest. Using unique data covering all German firms' FDI from 2002 to 2009, we estimate the model that allows for country-specific adaptation costs and firms' heterogeneous preferences for location attributes. The estimation results suggest that the adaptation costs are statistically and economically significant, ranging from 0.9% to 22.4% of a firm's average expected discounted profits. If adaptation costs were completely subsidized, firms' FDI location choices would change drastically. Moreover, the average expected discounted profit would increase by 10.9%, not only because of the reduction in adaptation costs but more importantly, due to better matching between firms and locations.

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.

Foreign direct investment and local interpretable model-agnostic explanations: a rational framework for FDI decision making

PurposeThis study aims to examine foreign direct investment (FDI) factors and develops a rational framework for FDI inflow in Western European countries such as France, Germany, the Netherlands, Switzerland, Belgium and Austria.Design/methodology/approachData for this study were collected from the World development indicators (WDI) database from 1995 to 2018. Factors such as economic growth, pollution, trade, domestic capital investment, gross value-added and the financial stability of the country that influence FDI decisions were selected through empirical literature. A framework was developed using interpretable machine learning (IML), decision trees and three-stage least squares simultaneous equation methods for FDI inflow in Western Europe.FindingsThe findings of this study show that there is a difference between the most important and trusted factors for FDI inflow. Additionally, this study shows that machine learning (ML) models can perform better than conventional linear regression models.Research limitations/implicationsThis research has several limitations. Ideally, classification accuracies should be higher, and the current scope of this research is limited to examining the performance of FDI determinants within Western Europe.Practical implicationsThrough this framework, the national government can understand how investors make their capital allocation decisions in their country. The framework developed in this study can help policymakers better understand the rationality of FDI inflows.Originality/valueAn IML framework has not been developed in prior studies to analyze FDI inflows. Additionally, the author demonstrates the applicability of the IML framework for estimating FDI inflows in Western Europe.

Ethical Leadership and Corporate Social Responsibility in Diversified Business Groups: a Conceptual Model of Asian and Latin America

Purpose: This research provides a brief review which explores theories and concepts in International Business (IB) and management, covering global market dynamics, factors influencing foreign direct investment, the role of national culture in socially responsible policies, decision-making processes, evolving trends in CSR, ethical leadership's relationship with CSR in diverse business groups, and advancements in online communication, simulation games, and enterprise systems. Valuable insights for practitioners and scholars are provided, illuminating the complexities of the dynamic field of business and management.
 
 Design/Methodology/Approach: This research paper employs diverse methodological approaches, including literature review, qualitative analysis, and theoretical modeling, to investigate various aspects of IB and management. Through a qualitative synthesis approach, key themes and findings related to the research topic are identified.
 
 Findings: This research highlights the significance of digital platforms in delivering global consumer value. Cultural differences influence Foreign Direct Investment (FDI) inflows, shaped by host country norms. European SMEs' profitability, responsible conduct, and B2B relationship tendencies are affected by national culture dimensions.
 
 Theoretical Implication: This analysis reveals the impact of digital platforms, cultural differences, and national culture on global markets and international business. It emphasizes ethical leadership, institutional diversity, strategic direction, and human rights.
 
 Managerial Implication: Managerial implications for international business strategies include leveraging digital platforms for value creation, assessing cultural agility competencies in talent identification, considering socio-cultural context in framing victimization experiences, incorporating factors like corruption, contract enforcement, IP protection, and cultural compatibility in FDI decisions.
 
 Industrial Implication: Significant implications found for the industry in utilizing big data, including ethical and legal considerations. Cultural adaptation crucial for FDI strategies and CSR initiatives. Ethical leadership as a competitive advantage for CSR.
 
 Originality and Value: This literature review highlights the significance of cultural adaptation in global markets, exploring the impact of national culture on corporate behavior. It introduces a novel model for ethical leadership and CSR in Digital Platforms and Ecosystems (DPEs). It serves as a valuable resource for researchers, policymakers, and practitioners in the field of International Business, identifying research gaps for future studies.

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 determinants of the use of process control mechanisms in FDI decisions in headquarters–subsidiary relationships

This study investigates the impact of foreign direct investment (FDI) motivations and technological resource commitment on headquarters’ employment of process control over subsidiaries, to better understand the process control mechanisms. Drawing on agency theory and the resource dependence perspective, a cross-sectional data model is developed among the 1541 Taiwanese manufacturing firms engaged in foreign investments, 1015 headquarters–subsidiary (HQ–Sub) relationships in China were selected from the database; in each of these relationships, the headquarters is located in Taiwan, while the subsidiary is located in China. Our findings reveal that the headquarters will use process control if the primary motivation for setting up a subsidiary in a host country is resource-seeking, but not use process control with market-seeking motivation. This control process relationship is enhanced/weakened/weakened by the headquarters’/subsidiaries’/partners’ technological resource commitment. Taiwanese multinational corporations (MNCs) from newly industrialized economies (NIEs) seeking to choose control mechanisms that fit their technological resources and FDI motivations in China are given guidelines. It adds to the use of control mechanisms with HQ-Sub literature. Both resource-seeking and market-seeking motivations shed light on technological resource commitment by various units of an MNC, to ward off information asymmetry.

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.

Ethical Leadership and Corporate Social Responsibility in Diversified Business Groups: A Conceptual Model of Asian and Latin America

Purpose: This research provides a brief review which explores theories and concepts in International Business (IB) and management, covering global market dynamics, factors influencing foreign direct investment, the role of national culture in socially responsible policies, decision-making processes, evolving trends in CSR, ethical leadership's relationship with CSR in diverse business groups, and advancements in online communication, simulation games, and enterprise systems. Valuable insights for practitioners and scholars are provided, illuminating the complexities of the dynamic field of business and management. Design/Methodology/Approach: This research paper employs diverse methodological approaches, including literature review, qualitative analysis, and theoretical modeling, to investigate various aspects of IB and management. Through a qualitative synthesis approach, key themes and findings related to the research topic are identified. Findings: This research highlights the significance of digital platforms in delivering global consumer value. Cultural differences influence Foreign Direct Investment (FDI) inflows, shaped by host country norms. European SMEs' profitability, responsible conduct, and B2B relationship tendencies are affected by national culture dimensions. Theoretical Implication: This analysis reveals the impact of digital platforms, cultural differences, and national culture on global markets and international business. It emphasizes ethical leadership, institutional diversity, strategic direction, and human rights. Managerial Implication: Managerial implications for international business strategies include leveraging digital platforms for value creation, assessing cultural agility competencies in talent identification, considering socio-cultural context in framing victimization experiences, incorporating factors like corruption, contract enforcement, IP protection, and cultural compatibility in FDI decisions. Industrial Implication: Significant implications found for the industry in utilizing big data, including ethical and legal considerations. Cultural adaptation crucial for FDI strategies and CSR initiatives. Ethical leadership as a competitive advantage for CSR. Originality and Value: This literature review highlights the significance of cultural adaptation in global markets, exploring the impact of national culture on corporate behavior. It introduces a novel model for ethical leadership and CSR in Digital Platforms and Ecosystems (DPEs). It serves as a valuable resource for researchers, policymakers, and practitioners in the field of International Business, identifying research gaps for future studies.

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.

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.

Subnational social trust and the internationalization of emerging market firms

This study examines how informal institutions at the home country subnational level drive the foreign direct investment (FDI) of firms from emerging markets, where informal institutions play a salient role because of the underdevelopment of formal institutions. Integrating the institutional escape view and institutional support view, we argue that social trust, as a critical dimension of informal institutions, affects firms’ FDI decisions. Using a sample of publicly listed firms in China, our empirical analysis finds an inverted U-shaped relationship between subnational social trust and the likelihood of firms’ international expansions. Furthermore, this relationship is contingent on firms’ affiliations with business groups.

The influence of natural disaster regional information on investment flows in Aceh

This research explores the impact of information on disaster areas on Foreign Direct Investment (FDI) in Aceh. This study aims to explain the relationship between information on disaster areas and FDI decisions to increase understanding of the factors influencing investment opportunities in Aceh. This study used qualitative methods to examine the relationship between information on disaster-prone areas and foreign investment. Qualitative analysis involves the relationship between the provision of information on disaster areas and the level of foreign investment in Aceh. Preliminary results indicate that the availability and accuracy of information on disaster areas has a major impact on foreign investors' risk perceptions and evaluations. Provision of timely and transparent information on disaster risks, mitigation measures, and government response strategies was observed to have a positive impact on investor confidence. Conversely, limited access to reliable information or perceptions of inadequate disaster preparedness may discourage potential investors from engaging in investment activities. The results showed that the level of information on disaster areas in Aceh was not satisfactory and tended to affect the level of investment in Aceh Province. Aceh has very limited resources and information compared to other provinces. The level of investment in Aceh is also not very high compared to other provinces which have also experienced major disasters. It is necessary to increase the provision of information on disaster areas and the integration between the disaster management office and the investment service also needs to be improved.

Dynamic capabilities and FDI in conflict zones: the role of diversification and stock management capabilities

PurposeDespite the increased level of national conflict around the world, outward foreign direct investment (FDI) targeting these areas has increased. This study aims to adopt a dynamic capability lens to examine the relationship between firm capabilities and the level of conflict in their FDI portfolio. The paper argues that conflict zones may be an attractive destination for a subset of firms, given their capability profile.Design/methodology/approachThe authors draw from a sample of US Fortune 500 firms (2019) to examine their FDI destinations; specifically, they collected data on the locations of their foreign subsidiaries, which resulted into a final sample of 118 diversified US firms. The model was analyzed using ordinary least squares multiple regression to predict the extent to which their FDI portfolios have ongoing domestic and international conflict and the impact of expansion in such conflict-stricken markets on firm financial performance (ROA).FindingsThe authors find that firms with greater international geographical diversification capabilities, as depicted by their geographic spread, and those with greater local stock management capability, as depicted by their initial public offering maturity, are more likely to launch subsidiaries in high ongoing conflict zones. Furthermore, the authors find that while it may be unprofitable for firms to seek FDI in high-conflict zones, firms that operate in strategic industries (manufacturing, infrastructure, natural resource extraction) experienced positive performance. This can be attributed to the fact that firms operating in these sectors are more likely to directly profit in the reconstruction/rebuilding of such conflict-stricken markets.Originality/valueWhile previous literature focused on macro-level factors, this study sought to highlight firm-level factors that determine FDI decision in conflict zones. The authors capture different dimensions/sources of firms’ dynamic capability, one resulting from foreign experience (i.e. geographic diversification) and the other from local experience (i.e. domestic stock management) to assess how each correlate with multinational corporations’ level of conflict in their FDI portfolio. Furthermore, the authors contribute to the understanding of the relationship between expansion in conflict zones and firm performance and highlight that industry does matter. Implications from this study highlight the importance of building risk management capabilities to handle not just expansion in conflict zones but also during challenging times like those brought about by pandemics.