Foreign Direct Investment Location Choice Research Articles

Wooing the new Chinese businesses: five short-term policies to attract direct investment

PurposeThe purpose of this paper is to identify location factors that Chinese managers look for when making internationalization decisions and how the factors stack up in perceived importance. Over the past ten years, Chinese enterprises have become more multi-national in nature. China’s outward foreign direct investment (FDI) has been growing at a phenomenal rate. In 2012, China became the third largest investor, after the USA and Japan; and the largest investor among developing countries. How can host governments attract more of this Chinese capital? What are some short- to medium-term policies that host governments can initiate to make their respective nations attractive to Chinese companies?Design/methodology/approachThe authors consider these questions by using a best-worst choice exercise among 114 senior corporate decision makers of Chinese companies who have or are planning to globalize. We rank 16 most common determinants that influence FDI location choice and evaluate their degree of importance.FindingsThe authors propose five “low hanging fruits” that policy makers should consider that could ensure their countries come within the radar of Chinese multi-nationals. These include promoting a clean and efficient business environment and strengthening/establishing political and economic relationships with China.Originality/valueThe originality of this study lies in the methodology of the study that forces respondents to make a trade-off in their decisions, which in a way is closer to reality. The respondents are also actual decision makers in their companies with regards to international investment decisions.

Social Support, Industrial Parks and FDI Location Choice Across Hungarian Counties

This study analyses the determinants of foreign direct investments in Hungarian counties in the period 2001–2011. Unlike previous studies, the role of local public policies was also tested. To this end, local government social welfare expenditures and special economic regulations are considered in the econometric model. The results highlight the importance of local government interventions in creating a favourable environment to attract FDI to Hungarian counties. Furthermore, market size, labour skills and agglomeration economies significantly influence FDI location choices.

Institutional distance, firm heterogeneities, and FDI location choice of EMNEs

Purpose This paper aims to propose an integrated framework combining the cost-reduction rationale and the institution-leveraging rationale to explain how institutional distance, both formal and informal, influences emerging multinational enterprises (EMNEs)’ foreign direct investment (FDI) location choice. This paper also explores the moderating role of EMNEs’ FDI experience and strategic intent on value chain positioning as a reflection of firm heterogeneities, on the link between institutional distance and location choice. Design/methodology/approach This paper tests the hypotheses based on a firm-level longitudinal data set of FDI by Chinese EMNEs. The unique data are manually collected from Chinese companies listed on Shenzhen and Shanghai Stock Exchanges, composed of 250 FDI entries of 122 manufacturing firms from 2006 to 2010. The conditional logit model is used to estimate the proposed main effect and moderating effect. Findings Cultural distance does not deter Chinese EMNEs’ entrance in general, but firms investing in low value-added manufacturing subsidiaries are more likely to choose culturally similar countries than those investing in high value-added subsidiaries such as in upstream R&D and downstream marketing. Formal institutional distance with positive direction promotes Chinese EMNEs’ entrance, and this effect is enhanced when firms have less FDI experience and have the strategic intent to invest in high value-added subsidiaries. Originality/value This paper contributes to the current literature by identifying a holistic view of the institutional influences on FDI location choice of EMNEs and revealing how firm-level heterogeneities, particularly FDI experience and strategic intent of subsidiary value chain positioning, shape the boundary conditions of the institutional effects in different ways.

FDI Location Decision: Evidence from Firms Investing in China

By relying on an extensive set of firm data for foreign affiliates in China, the paper investigates the determinants of FDI location choice for multinational firm subsidiaries located in different special economic and investment zones. Using a logit estimation, the results suggest that various factors explain the location choice of FDI in China, and vary according to the country of origin and the sector of activity. Overall, the results show that the protection of intellectual rights, the agglomeration economies, the investments in education and the GDP of the region affect the location choice of FDI. Implications can be drawn for policy-makers to divert FDI from coastal to inland regions. Finally, the last part of the paper derives, from the obtained results, implications for future research and theory building.

The Role of Experience in FDI Location Choice: Risk and High-Level Government Visits

FDI literature has presented consistent evidence that firm experience moderates the negative effect of risk on entry. This conclusion, however, is contested by recent research. By revisiting the co...

Balancing exploitation and exploration in FDI location choices

In this paper, I examine the location trajectory of foreign direct investments by emerging economy firms. I consider entries into countries with low cultural distance as exploitation, and entries into countries with high cultural distance as exploration in the internationalization process. Building on the organizational learning literature, I argue that the internationalization process is composed of a series of alternating exploitative and exploratory activities for a firm over time. Empirically, I propose to measure this process by the magnitude of the divergence in added cultural distance (i.e. the cultural distance that each new entry incurs relative to prior entries). In support of my argument, I find that the divergence in added cultural distance over time is far greater than what is predicted by the Uppsala internationalization process model and the springboard perspective. Moreover, I find that several firm- specific attributes can explain a sizable portion of the volatility of the internationalization process. Specifically, firm size, firm age, firm performance and organizational slack are significant antecedents of the fluctuations in the internationalization process.

Enterprises overseas cluster and foreign direct investment location choice of new entrants：An empirical research based on micro enterprises data in Zhejiang province

In this paper, we focused on the relationship of the overseas clusters and location choice for Chinese enterprises' foreign direct investment, both of which have recently become hot topics of theory research and policy concern. For there exists a big difference of economy condition in different host countries, China's enterprises pay attention to specific economic factors of host countries in location choice of foreign direct investment, and host countries' economic scale, per capita income, trade openness, resource conditions and other elements constitute the factors influencing location choice of enterprise' foreign direct investment. In addition,the overseas cluster of home countries' enterprises in host countries is another significant factor that cannot be ignored for enterprise' decision of foreign direct investment location choice. This paper structured the binary choice model by using the micro data of enterprises in Zhejiang province, and used the number of foreign direct investment projects in certain host country of Zhejiang's enterprises to measure the overseas cluster in that country. Based on these data, an empirical study was conducted in this paper and found that overseas enterprise cluster is an important location advantage for the host country to attract foreign direct investment from new enterprises. Furthermore, this advantage plays a greater role in countries that have richer resources and larger market scales. What is more, in order to eliminate the endogenous regression problem, the geographic distance was taken as the instrumental variable of enterprises' overseas cluster and a similar conclusion through two stage binary choice model was reached. We also found that the positive influence of enterprise overseas clusters on the attraction of new enterprises' foreign direct investment exist in both developed and developing host countries. The results of this paper indicated that there is self-continuity in the direct investment of foreign enterprises overseas cluster and reflected the importance of information in location choices for enterprises' foreign direct investment as well.

Do You Imitate Immediately? The Location Choices for Foreign Direct Investment

This study applies recency effect on interfirm imitation behavior to investigate whether recent location choices of peer firms regarding foreign direct investment (FDI) exert imitation pressure on another firm’s FDI location choices. This study examines the FDI data of listed companies in Taiwan. The results confirm the existence of recency effect. This study further indicates that the remote experience peer firms and a firm’s own experience have negative moderating effects on recency effect.

German and Austrian Foreign Direct Investment in Brazilian Regions: Which Are the Location Choice Factors?

Due to the liberalization and transformation of emerging markets economies, the attractiveness of these countries for foreign direct investors has been rising in the last decades. This paper explores foreign direct investment location choice factors of German and Austrian companies in Brazilian regions. We perform the quantitative analysis, based on the Multinomial Nested Logit Model and supplement its findings by the qualitative analysis, based on the semi-structured experts’ interview. The analyses shown that investor-nation specific agglomeration, industry specialization, workforce qualification and physical infrastructure were important FDI location choice factors for German and Austrian companies in Brazil. Suggestions for future research of the FDI location choice factors are discussed.

Regional heterogeneity and location choice of FDI in Korea via agglomeration and linkage relationships

Using the extensive micro data for 1998–2005, we analyze the role of agglomeration effects in terms of both horizontal and vertical aspects in the location decision of inward foreign direct investment (FDI) in Korea. The nested logit estimates support the follow-the-leader hypothesis. The network among FDI firms, backward linkage relationship with local upstream firms, and business service agglomeration are the main determinants of FDI location. Our estimation results suggest the possibility of a circular causality between the attractive force of backward agglomeration and the knowledge spillover of FDI, which brings in the geographical concentration of economic activities within a region. In addition, we find quite different location patterns between high- and low-tech industry groups. Reflecting the characteristics of the industry, whereas the centripetal force of foreign agglomeration increases gradually in the high-tech industry, it decreases gradually with the size of agglomeration in the low-tech industry. Furthermore, while regional gap of the labor cost matters in the location decision of low-tech firms, the regional quality of labor matters for the high-tech firms.

Regional financial development and foreign direct investment

In this paper, we examine the link between regional financial development and foreign direct investment using a large micro-level dataset of Chinese manufacturing enterprises. We first investigate the effect of regional financial development on foreign direct investment location choices, and find such development to significantly promote foreign direct investment. We then show that regional financial development also plays an important role in foreign direct investment productivity spillovers. Domestic firms located in financially developed regions gain positive knowledge spillovers from foreign direct investment, but the competitive pressure from multinationals exerts a negative influence on the productivity of domestic firms.

Foreign direct investment location choice of small- and medium-sized enterprises: The risk of value erosion of firm-specific resources

Drawing on the resource-based view and FDI theory, the present study introduces the risk of value erosion as a core concept to explain the moderating effect of SMEs’ resources (knowledge intensity and international experience) on the relationship between motives (market seeking, resource seeking, strategic asset seeking) and FDI location choice (developed countries vs. developing countries). Testing our theoretical predictions on survey data obtained from 100 German SMEs, our results indicate that knowledge intensity and international experience significantly influence the relationship between motives and SMEs’ FDI location choice. Adding this perspective, we provide an enhanced understanding of SMEs’ FDI location choice and beyond.

International experience and FDI location choices of Chinese firms: The moderating effects of home country government support and host country institutions

We examine the extent to which Chinese government support of foreign direct investment (FDI) projects and host country institutional environments interact with prior entry experience by Chinese firms, and how this interrelationship affects FDI undertaken by Chinese firms. We hypothesize that home country government support and well-established host country institutions enhance organizational capabilities to take risks in FDI. As such, they reduce the need to accumulate experiential knowledge and capabilities relating to entering host countries based on prior entry experience in a particular country when undertaking follow-up investment projects. Using a unique, hand-collected panel data set of Chinese publicly listed firms during 2002–2009, we find that home government support and well-developed host country institutions reduce the importance of prior entry experience and significantly increase the likelihood of FDI entry into a host country. Further, from our subsample analyses we identify differences between entering developed and developing host countries in terms of the impact of home country government support and quality of host country institutions. Our findings help explain the puzzle concerning why emerging economy firms have rapidly internationalized in a short period of time and do not follow the pattern predicted by classical IB theories.

Can FDI Location Choice and Operating Mode Choice Complement Each Other?

We explore how firms approach the joint decision on location choice and operating mode choice when they are making an FDI, and evaluate its performance implication, using a panel data on industrial firms in China. In order to address the endogeneity issue inherent in comparing post-entry performances, we employ the propensity score matching in conjunction with difference-in- differences approach. Our findings suggest that firms perceive locating in a high-agglomerated location and operating with a local partner firm as substitutes in gaining local knowledge. When we investigate the post-entry financial performance, however, our findings suggest the complementary nature in these two sources of local knowledge.

A race to lower standards? Labor standards and location choice of outward FDI from the BRIC countries

Scholars argue that multinational corporations tend to locate their investment in countries with lower labor standards, but empirical results are highly inconsistent. In this paper, we investigate the effect of differential labor standards on the location choice of outward greenfield foreign direct investment (FDI) from Brazil, Russia, India and China (i.e. the BRIC countries). We find robust evidence that while there is a tendency toward the attraction of FDI by lower labor standards in developed countries, such a “race” is absent in FDI directed to developing countries. Location choice is highly path dependent upon previous trading relations between the home and the host country, which hampers the MNCs’ ability to arbitrage. Conversely, capital mobility at the industry level is found to intensify the race to lower standards.

Who goes where and how? Firm and country characteristics in the choice of FDI type and location

This paper examines the roles of firm and country characteristics in determining multinationals' choice of foreign direct investment (FDI) type and location. Using Korean firm-level data, we find that highly productive firms are more likely than their less efficient counterparts to invest in tough markets and choose a combined FDI strategy rather than a solely horizontal FDI or vertical FDI strategy across host countries. These findings, consistent with recent theories in international economics, indicate that firm and country heterogeneities play a significant role in determining the FDI strategy of a multinational enterprise.

Guided Through the 'Red Tape'? Information Sharing and Foreign Direct Investment

What drives the observed tendency of new FDI, other things equal, to be attracted to locations where many other foreign investors are located? One explanation in the literature on FDI location is that expected benefits from agglomeration externalities make firms want to locate in agglomerated regions. Alternatively, potential investors get information about conditions in a host from firms in their own business network that already have experience from that country. We study how Norwegian FDI location choice depends on previous Norwegian presence, using information about institutional quality to separate the impact of information sharing from agglomeration externalities. The impact of previous Norwegian investors is larger in countries with low institutional quality. We interpret this as consistent with the presence of information sharing among Norwegian investors.

What to Know before Entering the Great China?—A Foreign Investors’ Perspective!

This review article aims to explore options of entering in China with a foreign direct investment (FDI) motive. With an attempt to investigate the FDI possibilities in China, the paper highlights key areas including, i.e., the determinants of FDI in China, various related entry modes, the logic and criteria for making suitable FDI Location choice in China etc. The findings of the paper offer extensive foresight on the popular FDI modes to enter China with pros and cons attached to the international investment venture.

Mind over money. FDI location choice in India

Foreign Direct Investment (FDI) is one of the driving forces behind the development of emerging markets. Since India began to liberalise its economy in 1991, the country has become increasingly attractive as FDI destination. The regional distribution of FDI, however, is largely unbalanced. Our data show that the location choice of FDI in India is particularly determined by the level of corruption, the literacy rate, the density of higher education institutes, and to a lesser extent also by the geographical location, thus revealing significant differences as compared with FDI location choices in China.

Regulatory policy and the location of bio-pharmaceutical foreign direct investment in Europe

This paper examines the relationship between cross-country differences in drug price regulation and the location of biopharmaceutical Foreign Direct Investment (FDI) in Europe. Simple theory predicts that price regulation in one country might affect total investment, but not the location of that investment, if sales are global. Nevertheless, some manufacturers threaten that the introduction of price regulation in a country will motivate them to move their investments to other countries. Are such threats cheap talk, or is there evidence that firms avoid price-controlling countries when making FDI location choices? We use data on 527 investments initiated in 27 European countries between 2002 and 2009 and find that investors are less likely to choose countries with price controls, after controlling for other determinants of investment. We also observe a relative decline in investment in countries that increased the stringency of regulatory regimes during our sample period. The effect is restricted to non-manufacturing investments and is most robust for those related to administrative functions.