Foreign Direct Investment Location Decisions Research Articles

Tax effects on foreign direct investment-Just a rerouting.

This paper investigates tax-related determinants of indirect foreign direct investment (FDI). In particular, it studies the effects of bilateral effective average tax rates, the strength of anti-tax avoidance rules in host countries and tax haven status of home countries on the volume of indirect FDI host countries receive. The paper uses the fourth edition of the OECD Benchmark Definition of Foreign Direct Investment (BMD4) database, which distinguishes between ultimate and immediate FDI. Methodologically, the paper relies on the standard gravity equation for FDI and applies the Poisson pseudo-maximum likelihood estimation model. The paper shows that ultimate FDI is not influenced by tax-related factors but only real economic determinants, whereas tax rates affect immediate FDI. This finding suggests that previous research may have overestimated the tax elasticity of FDI, and taxes do not have an impact on location decisions of FDI, but rather the route of investing-direct or indirect. The paper defines indirect FDI as the difference between ultimate and immediate FDI and finds that high bilateral effective average tax rates encourage indirect FDI. The finding is robust under different specifications.

Unveiling the Determinants of Foreign Direct Investment and Economic Growth in Central Asia

Empirical studies on the determinants of foreign direct investment (FDI) and the nexus between FDI and economic growth have reached mixed findings, leading to a long-standing debate among policymakers and researchers. This study explores the determinants of FDI and examines the impact of FDI on economic growth in Central Asian developing countries during 2000-2020. The Prais—Winsten regression with panels corrected standard errors and IV-2SLS estimation results indicate that trade openness, natural resources, and market size are the main factors determining the FDI location decisions of foreign investors in Central Asia. The estimates for economic growth suggest that foreign direct investment, natural resources, human capital, and infrastructure have a positive and significant impact on economic growth. On the contrary, the effect of trade openness is surprisingly negative.

Institutional quality and FDI location: A threshold model

This paper aims to explain why foreign direct investment (FDI) inflows into South and Southeast Asia are increasing as alternative production bases to China, but are concentrated in a few countries with better institution quality. The literature posits that labor costs are a major determinant of FDI location decisions. A model of FDI location is explored to examine the threshold role of institutional quality in determining the relationship between labor costs and FDI location. Using data from 14 South and Southeast Asian countries during 2000–2017, evidence shows that effects of labor costs on FDI are nonlinearly decreasing because their institutional quality is improved above threshold values. A better quality of institution reduces country-related costs for FDI location and undermines the negative relationship between labor costs and FDI location. This study contributes by exploring the role of institutional thresholds in determining FDI location and draws policy implications despite labor costs increases.

Motives for Inward Foreign Direct Investment into Thailand: A Quantitative Analysis

This study aimed to formulate a conceptual framework regarding the Foreign Direct Investment (FDI) location choice made by corporations and identified the motivational factors of the FDI location choices. The framework and associated hypotheses were empirically tested in Thailand. The framework was derived from existing FDI literature and consists of market, resource and efficiency seeking motives as well as institutional factors and general macroeconomic indicators towards the FDI location choice in Thailand. The objective of this research was to extend the understanding of FDI location decisions and hence provide more informed recommendations to Thai policy makers and business practitioners, as well as contribute significant knowledge to academic literature about the most influential determinants for FDI location choice in Thailand. The approach was a quantitative analysis as this provided an overview of the determining factors of FDI inflows into Thailand. Data from a number of companies was collected by using a questionnaire. In order to ensure the reliability of the proposed survey, quantitative techniques such as Cronbach's Alpha and Item-Objective Congruence were applied. Furthermore, descriptive statistics and a multiple linear regression analysis were used to determine the influence of the independent variables obtained from the conceptual framework of this research study. The research study identified that macroeconomic indicators, market-seeking motives and efficiency-seeking motives have a significant positive influence towards the FDI location choice of Thailand. Notably, resource-seeking motives and institutional factors did not have a significant influence. To the best of my knowledge this research study contains no material previously published or written by another person except where due reference is made in the text of the examinable outcome.

Sister cities, cross-national FDI, and the subnational FDI location decision

We investigate how intergovernmental ties at subnational levels between home and host countries influence the intensity and location of foreign direct investment (FDI) inflows. We focus on an intriguing type of subnational tie, namely, International Friendship (Sister) Cities. A sister city is a decentralized form of intergovernmental relationship that provides a platform by which a multinational corporation (MNC) can approach a local government, customers, and clients to acquire localized information and political capabilities. We argue that cities with a sister-city relationship attract more FDIs than other similar cities within a host country. The benefit extends to the national level as MNCs have higher FDI levels in host countries with a greater number of sister cities with their home country. We further investigate whether the effect of sister cities on an MNC’s country selection is greater when host-country subnational governments have a higher degree of autonomy relative to the national government, and lesser when governments have a higher level of policy uncertainty. Using data from the 1990–2009 period, we find consistent support for our ideas as tested at two levels of analysis: a city-level matched sample analysis on Japanese FDI inflows, and a country-level analysis on Japanese MNCs’ country selection.

Foreign Direct Investment in Nepal: A Study on its Impact on Employment

Foreign direct investment (FDI) plays an important role boosting industrial development and promotion of manufactured exports for the developing countries. FDI helps mobilization of capital, human and natural resources of the country, which in turn supports to make the economy dynamic and competitive. FDI is an important source of inflow of capital for economic growth and employment generation in developing countries. It also provides a package which constitutes new technologies and management techniques, financial and market access for the production and movement of goods and services. Though, attracting foreign direct investment has become the major challenges for host countries as it faces the challenges of identifying the major factors that motivate and affect the FDI location decision. That's why Nepal is at a point wherefrom it can excel for economic goals via FDI. Foreign investment is critical to enhance the transfer of capital, modern technology, management and technical skill, increase culture. This article attempts to explore the growth and trends as well as condition of FDI. The results show a significant association between the changes in FDI on Employment. The finding of multiple regression analysis between FDI and employment indicates that FDI is a significant predictor of employment.

Foreign Direct Investment, Natural Resources, Economic Freedom, and Sea-Access: Evidence from the Commonwealth of Independent States

This study examines the importance of natural resources, economic freedom, and sea-access in attracting foreign direct investment (FDI) inflows to the Commonwealth of Independent States (CIS), using panel data from 1998 to 2017. The Prais-Winsten regression with panel-corrected standard errors (PCSEs) is employed for all estimations. Feasible Generalized Least Squares (FGLS), Random Effects with Driscoll-Kraay standard errors (RE (D-K)), and Random Effects of Generalized Least Squares (RE (GLS)) estimators are used to test the sensitivity of PCSEs’ estimates to changes in the underlying empirical model, whereas Instrumental Variables with Two Stage Least Squares (IV (2SLS)), Limited Information Maximum Likelihood (LIML), and Baltagi’s Two-Stage Least-Squares Random-Effects (IV (EC2SLS)) estimators are used to address potential endogeneity concerns. The estimates confirm that natural resources, economic freedom, and sea-access are robust and decisive factors affecting FDI location decisions of foreign investors in CIS. More precisely, the results suggest that increased revealed comparative advantage in petroleum, higher economic freedom characterized by the increased government size and open markets, and territorial coastlines have a statistically significant and positive effect on FDI inflows to CIS transition economies. We also find that direct access to the Black Sea and the Caspian Sea provides a significant geographic competitive advantage to Azerbaijan, Kazakhstan, Georgia, Russia, Turkmenistan, and Ukraine in attracting FDI inflows over the other CIS member-states.

Foreign Direct Investment in Nepal

Foreign Direct Investment (FDI) is an important source of capital for economic growth in developing countries. It provides a package which constitutes new technologies, management techniques, finance and market access for the production and movement of goods and services. However, attracting FDI is a major challenge for host countries as it faces the challenge of identifying the major factors that motivate and affect the FDI location decision. The main FDI location factors are cost, market infrastructure, and technological, political, legal and socio-cultural factors. Despite several conflicting circumstances, Nepal is attempting to sort out overarching issues of FDI concerning with economic development. That’s why Nepal is at a point where from it can excel for economic goals via FDI. The set trends illustrate that various indicators pertaining to FDI in the country has been improving since peace process was begun in 2006. This analysis comes to conclusions that the country owns unique advantages and, thereby, opportunities of FDI useful for the country’s prosperity. Yet FDI in the country is not free of challenges, thus, that need to be timely addressed with prudent measures.

WHAT DO WE KNOW ABOUT THE IMPACT OF INTELLECTUAL PROPERTY RIGHTS ON THE FOREIGN DIRECT INVESTMENT LOCATION (COUNTRY) CHOICE? A REVIEW AND RESEARCH AGENDA

AbstractDespite a longstanding debate, at both a theoretical and empirical level, research on the relationship between foreign direct investment (FDI) and intellectual property rights (IPRs) remains scant and ambiguous. As a result, the link between IPR strength and multinational enterprises’ (MNEs) propensity to invest is unproven and seemingly dependent on a number of factors. We critically review the theory and evidence of the influence of IPRs on FDI and MNEs’ investment location (country) decisions both to ‘take stock’ of existing knowledge of this relationship and, by identifying gaps in, and shortcomings of prior work, develop a fruitful research agenda. We find that existing empirical work on the IPR–FDI nexus, though skewed in favour of a positive relationship between IPR protection and FDI, is fragmented, inconclusive and unable to square the conflicting theoretical predictions on how the strength of IPRs can affect MNEs’ FDI location decisions. Several issues and challenges are highlighted to explain the difficulties of the collective body of past empirical work to provide a definite answer to the question of the impact of IPRs on FDI, from which valuable recommendations are proposed to guide future applied research.

Location choice, ownership structure and multinational performance

PurposeThis paper aims to link location choice and ownership structure to the debate on the multinationality–performance relationship.Design/methodology/approachThis paper draws on a panel data set that covers 1,321 emerging economy multinational enterprises (EMNEs) and includes 4,227 observations from 44 emerging economies between 2004 and, 2013.FindingsThe empirical results find that multinationality has a positive effect on EMNEs’ performance, and that this positive effect is larger for their investments in developed countries than in developing countries. The study also finds that this positive effect of foreign operation in developed countries switch to negative at higher levels of multinationality for privately owned EMNEs than for state-owned EMNEs.Originality/valueThis paper provides new empirical evidence to support an institutional perspective of the internationalisation of EMNEs that are investing in developed countries, contributing to the multinationality-performance literature, highlighting the importance of foreign direct investment location decision and ownership structure.

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.

Explaining variability in the investment location choices of MNEs: An exploration of country, industry and firm effects

This paper examines the variation in foreign direct investment (FDI) location decisions of European multinational enterprises (MNEs.) An innovative empirical approach is applied to a new data set which contains over 15,000 individual FDI location decisions in 25 European countries over a 17-year period and combines country-, industry- and firm-level factors. The empirical results show that the responsiveness of FDI location choices to country-level factors is heterogeneous both across sectors and across firms of different characteristics as well as unobserved factors. For example, the results show that the importance of market size increases with investing firm’s size and skill intensity, while proximity between countries, as well as cultural and linguistic ties are more important for smaller firms.

Location decisions of inward FDI in sub-national regions of a host country: Service versus manufacturing industries

Built on the differences between services and manufacturing sectors, this study examines the general proposition that service and manufacturing multinational enterprises (MNEs) have different responsiveness to location-specific characteristics when conducting foreign direct investment (FDI), and that these differences influence their final locations in the sub-national regions of a host country. Using a full population of 1,212 and 6,199 inward FDI projects conducted by MNEs in manufacturing and services sectors, respectively, across 234 sub-national regions in Korea between 2000 and 2004, it finds that the location decisions made by service MNEs are more likely to be driven by demand-side considerations, whereas those made by manufacturing MNEs are more likely to be influenced by supply-side characteristics of sub-national regions. In addition, it shows that sub-national location decisions made by both high-tech and low-tech manufacturing MNEs consider the availability of local strategic assets within a focal region more importantly than that from its neighboring regions, suggesting the importance of intra-regional effects. Sub-national location decisions made by location-bound service MNEs exhibit the same intra-regional effects for local market potential; however, those by non-location-bound service MNEs consider the local market potential from neighboring regions more importantly than that within a focal region, suggesting the existence of inter-regional effects.

An empirical test of the pollution haven hypothesis for China: intra-host country analysis

Purpose – This paper aims to, under the framework of the pollution haven hypothesis (PHH), test the theory that foreign direct investment (FDI) creates an intra-host country pollution haven in developing nations by studying the contemporary case of China. Design/methodology/approach – This empirical analysis has used a panel dataset of 30 provinces that was analyzed for the period of 1997-2011. An Oaxaca decomposition was also implemented to examine the effects of environmental stringency on regional pollution. Findings – The estimates indicate that openness to FDI generally appears to be good for the environment. The results of estimation show that the western region of China has developed a potential “comparative advantage” in pollution-intensive industries, thanks to the strong incentive of economic expansion. However, further estimates concerning the location decisions of FDI suggest that the providers of FDI still prefer to locate in the coastal regions of China, where a tighter environmental regulation policy has been imposed. The findings suggest that the better infrastructure and technology spillover of environmental policy-making might be more attractive to FDI than comparatively weak environmental stringency. Originality/value – This study applies a model advanced in previous theoretical literature which divides the effects of trade into the categories of scale, technique and composition. It also contributes to the understanding of the PHH in the context of intra-host country analysis.

Does human capital development matter in FDI location decisions? A case for Austria

This paper investigates the relationship between human capital development and foreign direct investment (FDI). In particular, the direction of causality between these two variables is the main focus of this study. This study has been necessitated by the failure by many previous researchers to concur on the causal relationship between FDI and human capital development. Some authors argue that there is a uni-directional causality relationship running from FDI to human capital development whilst others are saying the causality runs the other way round from human capital development to FDI. The other group of authors says there is a bi-directional relationship between these two variables whilst the fourth and last group of authors maintains that there exist no causal relation at all between FDI and human capital development. Using the lagged error correction model (ECM), the study observed that FDI measured by FDI, net inflows (% of GDP) was Granger caused by human capital development (proxied by pupil-teacher ratio) both in the short and long run. However, the null hypothesis which says that FDI Granger caused human capital development was rejected both in the short and long run. The author therefore recommends the intensification of teacher-pupil ratio improvement programmes in order not only to increase FDI inflow but to ensure Austria benefits from that increased FDI inflow

An Analysis of Double Taxation Treaties and their Effect on Foreign Direct Investment

Double taxation treaties (DTTs) are intended to eliminate double taxation and thereby increase foreign direct investment (FDI). DTTs are also meant to prevent tax evasion which previous literature argues has a negative effect on FDI. Using matching econometrics and a large data set of developed to less developed country-pairs, I show that despite their intentions and the significant costs of entering into DTTs, the treaties have no effect on the flows of FDI. An analysis of the treaties in conjunction with the related domestic tax legislation shows why this is the case. Developed countries unilaterally provide for the relief of double taxation and the prevention of fiscal evasion regardless of the treaty status of a host country. This eliminates the key economic benefit and the risk that these treaties would otherwise create for the FDI location decisions of multinational enterprises.

Multinational Location Decisions and the Access to Imported Inputs

Although the influence of agglomeration economies on foreign direct investment location decisions is widely recognized in the literature, the nature of positive externalities is less well understood. This paper examines a particular source, access to specialized imported inputs, by applying a conditional logit model to the location decisions of Taiwanese multinationals in China. Our evidence, based on the 2,918 foreign direct investment projects approved between 1994 to 2006 in conjunction with Chinese customs data, reveals a positive effect of access to imported intermediate inputs and capital goods on the average investment, with effects that vary by industry group, time period and investment stage.

The FDI location decision: Distance and the effects of spatial dependence

We investigate how different conceptions of distance impact upon one of the fundamental decisions made by foreign investors, the choice of foreign direct investment (FDI) location within the selected host country. We argue that the attractiveness of host country locations to foreign investors depends not only upon location-specific attributes such as labor costs, but also upon the location's proximity to alternative locations. We provide theoretical rationales for how and why alternative concepts of distance might impact upon firms’ FDI location decisions, and explicitly model different measures of geographic, economic and administrative distance. Empirically we illustrate the use of a number of spatial regression models with a new dataset on FDI in Chinese prefecture-cities, and have shown, in this context, that geographic distance is not the ‘best’ measure of distance to use. We find clear evidence of spatial dependence between the cities based upon economic distance, with weaker evidence related to administrative distance. The distinctive contribution of this paper is to emphasize that city-level policy to attract FDI is more likely to succeed if the prefecture-city is economically (and administratively) close to alternative city locations, while any policy expenditure may fail to attract FDI inflows if the prefecture-city is distant from other city locations.

Firm heterogeneity in modelling foreign direct investment location decisions

This article investigates the probability of the FDI location decisions of multinational enterprises using a mixed logit panel data model, which is the most flexible discrete choice model. We employ a three-level data set, which includes over 1100 FDI location decisions into 13 alternative Central and Eastern European Countries (CEECs) over an 11-year period. Our empirical results on the effect of host country, industry and firm characteristics on the probability of undertaking FDI in a particular location are significant and consistent with the predictions of our theoretical model.

The FDI Location Decision: Modelling Conceptions of Distance

We investigate how different conceptions of distance impact upon one of the fundamental decisions made by foreign investors, the choice of foreign direct investment (FDI) location within the selected host country. Most the extant literature treats alternative locations as distinct places, and implicitly assumes that the distances between these alternative locations have no impact upon the likelihood of FDI location. However, the boundaries between these locations are often quite arbitrary and defined by administrative fiat rather than political-economic reality, and proximate locations may well impact significantly upon each other's attractiveness to foreign investors. This results in a situation of spatial dependence which, if ignored, can give raise to various estimation and inference problems. The contribution of this paper is to investigate different specifications of this spatial dependence linked to various geographical, economic and administrative measures of distance.