Investment Location Decisions Research Articles

The impact of energy prices on industrial investment location: Evidence from global firm level data

This study examines the influence of relative energy prices on the geographical distribution of industrial investments across 41 countries. Employing a gravity model framework to analyse firms’ investment location decisions, we estimate the model using global bilateral investment flows derived from firm-level M&A data. Our findings reveal that a 10% increase in the energy price differential between two countries results in a 3.2% rise in cross-border acquisitions. This effect is most pronounced in energy-intensive industries and transactions targeting emerging economies. Furthermore, policy simulations suggest that the impact of unilateral carbon pricing on cross-border investments is modest.

Internal versus external agglomeration advantages in investment location choice: The role of global cities’ international connectivity

Global location choices for foreign direct investments by MNCs aim to benefit both from the advantages of collocation with other activities of the firm (internal agglomeration) and the advantages of proximity to local industry clusters of similar activities (external agglomeration). We submit that there are important trade-offs between internal and external agglomeration because internal knowledge transfer associated with collocation of various value-chain activities of the MNC is confronted with greater risk of knowledge spillovers to rival firms if there is a substantial local cluster. Moreover, we argue that the international connectivity of a location reduces the importance of local agglomeration as a driver of investment location decisions because connectivity allows the MNC to reap benefits from agglomeration at a distance through the (temporary) transfer of people and knowledge. Connectivity changes the trade-offs between internal and external agglomeration because it enhances the spatial reach of internal agglomeration more than external agglomeration. The influence of connectivity is greater for service-related value-chain activities than for production-related activities. We find support for these hypotheses in an analysis of 38,873 greenfield cross-border investment decisions across diverse value-chain activities and industries in 71 global cities, 2008–2016.

Nation branding as a tool to attract foreign direct investments: a case study of Qatar

Nation branding plays a critical role in attracting foreign businesses and, by extension, sustaining countries’ economic development and global competitiveness. Using Qatar as a lens for investigation, this research applied the single, embedded case study method. Purposive sampling with key decision makers in Qatar-based foreign companies representing diverse geographies and industries were used to understand the influence of nation branding on their investment location decision. The findings revealed five key thematic features of Qatar’s nation brand as an investment destination: socioeconomic prosperity, integrated global hub, activist engagement, collectivist culture, and high-end lifestyle. These brand characteristics were compared in relation to the Eclectic Paradigm’s locational advantage and the Anholt Ipsos NBI’s dimensions of exports, governance, culture/heritage, people, tourism, and investment/immigration. The dimensions exerted a strong effect on Qatar’s nation brand and varying levels of influence on FDI attraction. This research contributes to the nexus between nation branding and the FDI literature. Importantly, the results of the study provide useful guidance to government officials, policymakers, and public and private agencies involved in investment promotion. The findings will also prove relevant to foreign investors with regard to their international expansion and location choice.

Policy Drivers of Inter-Regional Investment in China

We examine how the policies of Chinese regional governments affect the investment location decisions of firms. Using a dataset compiled from the reports on the investment decisions of 498 listed Chinese companies headquartered in the provinces of Guangdong, Jiangsu, Shanghai, and Zhejiang, we estimate discrete choice models of the investment decisions of these firms. The variables of interest relate to government policies, but we also control for both market and firm characteristics. The provision of superior communications infrastructure leads to an increased probability of investment, as does a lower proportion of state-owned enterprises and a lower burden of regional government administrative expenses. We quantify potential changes in the probability of attracting investment by calculating the average marginal effects over a range of values of the variables of interest. Our extraction of primary data on firms directly from their annual reports allows us to address a gap in the literature with respect to the influence of regional government policies on investment decisions during a historical period (2000–2010) when inter-regional investment was particularly important as it saw a move to the decentralisation of decision making to regional government level. Our results provide useful guidance as to how local governments can best attract investment, namely by focusing on improving communications infrastructure, reducing government ownership of the means of production, and reducing administrative burden. Although there is currently a renewed focus on central government control, these findings remain relevant and can contribute to the ongoing debate concerning the optimal balance between centralisation and decentralisation.

Domestic Investment Incentives in International Trade Law

AbstractDomestic Investment Laws (DILs), a prominent tool of contemporary unilateral International Economic Law (IEL) in the context of the Liberal International Order (LIO), consistently provide for investment incentives as a key aspect of domestic industrial policies geared to influence investment location decisions. The various types of investment incentives include fiscal measures to attract investment, direct subsidies, and other regulatory measures aimed at creating favorable administrative and regulatory conditions for investment. This article analyzes how the provisions of the World Trade Organization (WTO) Agreements contain basic disciplines and set limitations for the distortive effects of investment incentives. It is argued that the relevance of WTO law for domestic investment incentives should not be under-stated; rather, DILs providing investment incentives should be treated as a limited exception to the ongoing move from international to domestic in the era of the LIO.

Does language affect the location choice of developing-economy MNEs? The case of Moroccan outward FDI

The present paper investigates the effect of linguistic distance on location decisions of Moroccan outward foreign direct investment (FDI) using panel data on 54 host countries from 2007 to 2021 and the robust weighted least squares estimation method. The results show that the higher the share of French- and Arabic-speaking populations, the more the host country attracts FDI from Morocco. Also, the results show that the higher the share of the English-speaking population, the less the host country attracts FDI because English-speaking countries tend to adopt institutional structures (the Anglo-Saxon way of governance) that differ from the French model inherited by Morocco during its colonization. For Spanish, there is no effect on the location decisions of Moroccan multinational enterprises because of the language’s marginalization at the formal level. The study highlights important policy considerations for home and host countries in terms of investment policy and investment promotion, language-in-education policies, and the role of international cultural and linguistic institutes in home and host countries.

Location choice determinants of Chinese and US firms in Africa: Does spatial interdependence play a role?

AbstractIn an increasingly integrated global market, the nature and extent of spatial interdependence is one key factor influencing firms’ location decisions. Spatial interdependence often manifests itself in the form of agglomeration or congestion effects, not just within a country but also in a region. Using Chinese and US overseas investment data, this study presents empirical evidence on the role that neighbouring countries (third‐country effects) play in attracting Foreign Direct Investment (FDI) to a host country. The study's findings show that there is evidence of spatial interdependence both for Chinese and USA FDI flows to African countries. For both countries, the third country effects come through either explanatory variables (including market size, domestic credit, trade costs and the share of service sector), error term or the amount of FDI in neighbouring countries. The findings also show that there is more robust evidence that, unlike Chinese FDI, the US FDI takes into account the market potentials of not just a host country but also that of a neighbouring country in making investment location decisions.

Multinational Banks and IMF Conditionality

AbstractWe find firm-level evidence that US banks receive preferential treatment in countries under IMF conditionality. We rely on investment location decisions to infer firms’ expectations about future profits and find that US firms are approximately 53 percent more likely to acquire financial firms in countries under financial conditionality. IMF programs without financial conditionality and FDI in other sectors serve as placebo tests. Financial conditionality has weak effects on investment decisions by non-US firms, which implies a political-economy interpretation. Firm-level data indicate that the distinctive behavior of US firms is not due to advantages of scale or to a US-firm fixed effect, but to US influence in the IMF. Firms from other major IMF shareholders benefit as well, but the effects are much weaker. The effects are concentrated in the politically relevant firms that have local affiliates, which is consistent with the interpretation that firms lobby for preferential treatment.

Does locational marginal pricing impact generation investment location decisions? An analysis of Texas’s wholesale electricity market

Using data from Texas’s wholesale electricity market, we investigate the relationship between nodal prices and investment location decisions of utility-scale generation. We find some evidence that new investment arises in areas with recently elevated nodal prices. However, we find no evidence that new generation resources receive a nodal price premium post-entry as projected by the expectation of higher nodal prices. Further, a logit regression analysis suggests that the probability of natural-gas-fired generation investments tends to increase with expected nodal prices in peak hours. However, the estimated relationship is statistically and economically weak and sensitive to model specification. These findings suggest other factors are more important drivers than nodal prices of location decisions for utility-scale generation investments in Texas.

On the Future of Business Income Taxation in Europe

How should Europe respond to society’s calls for a sound and properly functioning corporate tax system for the internal market? With the aim of contributing to the deliberations on this subject, the proposal of the author is for the EU Member States to jump ahead in the debate and remodel the CCTB/CCCTB draft directives into a new system of international taxation, i.e. a unitary taxation model for taxing the worldwide economic profits of multinationals, using a destination-based apportionment formula (CCCTB 2.0) to apportion the tax base to countries both within and outside the European Union. Under such a system, it would be up to the EU Member States themselves to determine the rate applying to the tax base apportioned to them. This would take tax out of the equation in the case of marginal financing and investment decisions, while also curtailing its influence on investment location decisions and, at the same time, making “gaming the system” more difficult. EU Member States would, in turn, regain their autonomy to set their corporate tax rates at the levels they regard as appropriate, while the proposed model would also end the “race to the bottom” within the European Union. If the European Union were to be the first mover, self-interest would prompt other countries and regions to follow its lead. The resulting production location neutrality would encourage international businesses to embrace the model and lobby for transition as rapidly as possible. Driven by self-interest and competitive responses, such a move could initiate a transition to the worldwide adoption of destination-based taxation of excess earnings – in other words, harmonization through competition. As the innovator, the European Union would enjoy the greatest economic benefit during the transitional period, when countries’ profit tax systems would be evolving towards an equilibrium in which destination-based tax would become the new global standard. The final destination would be a new destination-based company tax paradigm operating both neutrally and non-discriminatorily on the supply side. That would produce a result that would not only be fair, but would also – and primarily – provide a systemic and economically efficient solution for the international problem of BEPS.

Japanese investment location choice in the US: a home-country firm bandwagon effect

ABSTRACT This study examines the relationship between home-country firm concentration and investment location decision, using data from a sample of Japanese subsidiaries established in the US between 2003 and 2017. Results show that when Japanese firms consider locating operations in the US, they give priority to states where other Japanese firms are already established, over any other firm- or location-specific determinants. Furthermore, industry concentration exerts a moderating effect on the co-national bandwagon effect under study, suggesting that the social network of established Japanese firms becomes a deciding factor in the absence of other attractive economic attributes.

On the Future of Business Income Taxation in Europe

How should “Europe” respond to society’s calls for a sound and properly functioning corporate tax system for the internal market? With the aim of contributing to the deliberations on this subject, the proposal of the author is to remodel the CCTB/CCCTB draft directives into a unitary taxation model for taxing the worldwide economic profits of multinationals and using a destination-based apportionment formula (the “CCCTB 2.0”) to apportion the tax base to countries, both within and outside the EU. Under the proposal it would be up to EU member states themselves to determine the rate applying to the tax base apportioned to them. This would take tax out of the equation in the case of marginal financing and investment decisions, while also curtailing its influence on investment location decisions and, at the same time, making “gaming the system” more difficult. EU member states would, in turn, regain their autonomy and scope to set their corporate tax rates at the levels they regard as appropriate, while the proposed model would also end the “race to the bottom” within the EU. If the EU were to be the first mover, self-interest would prompt other countries and regions to follow its lead. The resultant production location neutrality would encourage international businesses to embrace the model and lobby for transition as rapidly as possible. Driven by self-interest and competitive responses, such a move could initiate a transition to worldwide adoption of destination-based tax of excess earnings: in other words, harmonization through competition. As the innovator, the EU would enjoy the greatest economic benefit during the transitional period, when countries’ profit tax systems would be evolving towards an equilibrium in which destination-based tax would become the new global standard. The final destination would be a new destination-based company tax paradigm operating both neutrally and non-discriminatorily on the supply side. And that would produce a result that would not only be fair, but also – and primarily – provide a systemic and economically efficient solution for the international problem of BEPS.

MODELING THE INFLUENCE OF ATTRACTIVE PETROLEUM FISCAL REGIME DIMENSIONS ON MARGINAL FIELDS’ INVESTMENT CLIMATE IN MALAYSIA

Attractiveness of a country petroleum fiscal system plays significant role in investment location decisions. This study modeled the influence of attractive petroleum fiscal regime dimensions on marginal oil fields' (MOFs) investment climate in Malaysia. The dimensions examined in this study are fiscal administration/economy, fiscal certainty, fiscal efficiency, and fiscal equity/neutrality. Data was collected through survey of accounting, business and taxation experts' within Malaysian MOFs subsector. It was analyzed using Partial Lease Square (PLS) – Structural Equation Modeling (SEM) version 3 and Special Package for Social Science (SPSS) version 19. The results showed that fiscal certainty, fiscal efficiency and fiscal equity/neutrality were found to have significant positive influence on marginal oil fields' investment climate, adversely insignificant influence of fiscal administration/economy on marginal oil fields investment climate was reported. The result has established weaker link between petroleum fiscal regime administration and MOFs' investment climate in Malaysia, thus highlighting the scope for improvement on this dimension. Therefore, it is recommended that concerned authorities should consider strengthening of the administrative framework of MOFs' fiscal regime, thereby enhancing its investment climate. To the best of our knowledge this is the first study that employed the use of experts' perception in modeling the influence of attractive fiscal regime dimensions on oil and gas fields' investment climate, and eventually investment location decisions.Keywords: attractive petroleum fiscal regime, investment climate, investment location decisionJEL Classifications: M4, M48, Q4, Q48DOI: https://doi.org/10.32479/ijeep.7721

Host country experience, institutional distance and location choice of Chinese MNEs

PurposeThe conventional wisdom suggests that the lack of prior host country-specific experience and a higher institutional distance deter multinational enterprises (MNEs) from entering a foreign country. However, past studies report that Chinese MNEs show an unconventional risk-taking behavior choosing foreign locations, where they have no prior experience or there is an increased institutional distance. Drawing on the institutional theory, the purpose of this paper is to argue that Chinese Government official visits to the host country may act as a risk-reduction device, thus providing an explanation for such an unconventional behavior.Design/methodology/approachThe authors develop two hypotheses regarding how Chinese Government official visits moderate the impact of host country-specific experience and institutional distance on the location choice of Chinese MNEs. The authors test the hypotheses using a sample of investment location decisions by Chinese MNEs in Latin America.FindingsThe authors find that government official visits mitigate the lack of firm’s prior host country experience. However, only high-level government visits reduce institutional distance.Originality/valueThe authors contribute to the international business literature by analyzing how home country government diplomatic activities may pave the way of host country institutional environment for foreign MNEs from that home country. In addition, the authors provide an additional explanation for the unconventional risk-taking behavior of Chinese MNEs. Finally, the authors also contribute to a better understanding of the decision-making process of emerging-market MNEs entering other emerging economies.

Analysis of the Role of Commercial Real Estate in the Economic Development of the Northeastern United States

Research on the relationship between real estate investment and economic growth has a long history in the economic development literature. This study adds to the literature by focusing on the largest segment of commercial real estate, retail establishments. Not only quantifying the economic impacts of retail establishments, but also understanding how the economic and socio-demographic characteristics of an area affect investment location decisions, contributes to the understanding of regional growth process. A 3SLS simultaneous equations model derived from is used to analyze the role of “small” and “large” retail establishments in the economic development of the Northeast region of the United States. The study concludes that growth in retail establishments indeed plays a significant role in the economic growth process in the study region. Counties’ government expenditure and housing values play a strong role in attracting retail businesses. Population density has different effects on “small” and “large” retail establishments; high population density areas are found to be attractive, particularly to “small” retail establishments, whereas “large establishments” prefer areas with low population densities.

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.

Dijkstra’s-DBSCAN: Fast, Accurate, and Routable Density Based Clustering of Traffic Incidents on Large Road Network

Incident hotspots are used as a direct indicator of the needs for road maintenance and infrastructure upgrade, and an important reference for investment location decisions. Previous incident hotspot identification methods are all region based, ignoring the underlying road network constraints. We first demonstrate how region based hotspot detection may be inaccurate. We then present Dijkstra’s-DBSCAN, a new network based density clustering algorithm specifically for traffic incidents which combines a modified Dijkstra’s shortest path algorithm with DBSCAN (density based spatial clustering of applications with noise). The modified Dijkstra’s algorithm, instead of returning the shortest path from a source to a target as the original algorithm does, returns a set of nodes (incidents) that are within a requested distance when traveling from the source. By retrieving the directly reachable neighbors using this modified Dijkstra’s algorithm, DBSCAN gains its awareness of network connections and measures distance more practically. It avoids clustering incidents that are close but not connected. The new approach extracts hazardous lanes instead of regions, and so is a much more precise approach for incident management purposes; it reduces the [Formula: see text] computational cost to [Formula: see text], and can process the entire U.S. network in seconds; it has routing flexibility and can extract clusters of any shape and connections; it is parallellable and can utilize distributed computing resources. Our experiments verified the new methodology’s capability of supporting safety management on a complicated surface street configuration. It also works for customized lane configuration, such as freeways, freeway junctions, interchanges, roundabouts, and other complex combinations.

Cultural Diversity in Western Asia: Econometric Modeling of Trust and Ranking by Homogeneity

The main objective of the research is to discover Western Asian countries in the dimensions of new institutional economics: ethnicity, language, religion and trust. The region significantly overlaps with the Middle East which is growing in population terms. It makes mentioned issues interesting for discussion. In order to evaluate a relationship between ?Ethnicity and Trust?, Language and Trust? and ?Religion and Trust? a correlation and regression analysis is conducted. The author also makes an attempt to determine the influence of these three independent variables on the dependent variable ?Trust?. Additionally, a new complex estimator, consisting of ?Ethnicity?, Language? and ?Religion? fragmentation indices, was created and computed. The complex estimator allows to evaluate cultural diversity of the region - homogeneity or heterogeneity - in terms of ethnicity, language and religion simultaneously, as well as to determine the most trustful societies. Business agents may base their investment-location decisions on the complex estimator as an additional informational criterion of risk reduction.

(International Investment Location Decisions: The Case of Korean Firms into China)

Korean Abstract: 본 연구의 목적은 한국의 對중국 직접투자에 대한 결정요인을 분석하기 위한 것이다. 본 연구에서는 1988~2002년까지 중국의 각 省別 자료를 패널자료로 구축하여 중국에 직접투자를 실행한 한국기업의 FDI 결정요인을 분석하였다. 한국기업의 대중국 직접투자가 생산요소의 가격차이를 이용하기 위한 생산효율추구형 투자(factor proportions FDI)인지 아니면 투자지역의 시장진출을 목적으로 하는 시장추구형 투자(market access FDI)인지 분석하였다. 특히 對중국 FDI 투자시기를 투자 초기(1988~1997)와 최근(1999~2002)의 두 기간으로 구분하여 분석함으로써 對중국 FDI 투자의 결정요인이 어떻게 변화되어 왔는지 살펴보았다. 아울러 전 세계의 對중국 직접투자 결정요인과 비교 분석도 함께 시도하였다. 분석 결과 한국의 對중국 FDI는 시장추구형과 생산효율추구형의 혼합형으로 나타났다. 이를 좀더 세분화하여 분석했을 경우 투자 초기의 對중국 FDI는 생산효율추구형 투자가 지배적이었으나 최근의 對중국 FDI는 생산요소 가격차이를 활용하기 위한 투자보다 시장추구형투자가 더 일반적인 경향으로 나타났다. 이러한 분석결과는 최근의 전 세계 투자패턴과도 일치하는 것이다. 또한 본 연구의 분석결과에 의하면 한국의 對중국 FDI에 있어서 인프라(infra) 수준은 상대적으로 입지결정에 영향을 미치지 못하며, 각 省別 개혁정도가 직접투자에 상당한 영향을 미치고 있음을 발견할 수 있었다. 이는 중국의 개혁과 개방속도가 가속화될수록 한국의 對중국 FDI는 증가할 것이라는 추론을 가능케 한다. 이상의 분석결과를 종합하면, 현재 한국의 對중국 FDI는 중국의 저렴한 노동력을 이용하는 초보단계의 직접투자에서 벗어나 중국의 방대한 시장을 공략하고자 하는, 보다 적극적인 투자로 변화되어가고 있는 단계로 볼 수 있다. 다시 말해서 對중국 직접투자 초기에는 노동집약적인 산업 중심의 소규모 단위 투자에서 점차 자본집약적인 산업 중심의 대기업 위주 투자로 변모해가고 있는 것으로 분석되었다 English Abstract: Recent literature maintains there are at least two explanations for the motivations of FDI, one involving trade barriers (horizontal-FDI) and the other factor proportions hypothesis (vertical-FDI). The first view is that multinationals act in order to overcome trade barrier, and the second view is that multinationals arise to take advantage of international factor price differences. The purpose of this paper is to study the motivations of Korean foreign direct investment in China. Using the panel data on Korean FDI in China for the years 1988-2002, we examined the geographic determinants of direct investment in China from Korean firms. In doing so, we investigated, on the one hand, to what extent multinational activity is consistent with the factor proportions theory, i.e., to what extent multinational activity is related to cheap factor supplies. On the other hand, we study the market access motivation for multinational activity. Our econometric results suggest that factor proportions hypothesis is indeed the dominant influence on investor calculations for the early period of Korean FDI in China. Since end of 1990s, however, market-seeking FDI pattern is more common than FDI motivated by factor price differentials. We also find that the hypothesis that good-quality infrastructure is conducive to attracting FDI is not supported for Korean firms. Evidence supports the claim that regions with high degree of reform, which implement preferential treatments to foreign investors, still have advantage over other regions in attracting FDI. In sum, the findings in this paper indicate that Korean FDI for the early period of Korean FDI in China is consistent with motives related to the factor proportions hypothesis, which explains that one of the determinants of FDI is to exploit the cheap labor of this country. On the other hand, recently motives related to horizontal FDI are more common.