Location Choice Of Multinational Enterprises Research Articles

International attractiveness of cities: The drivers of urban FDI

AbstractForeign direct investment (FDI) nowadays mostly corresponds to activities in urban areas. This study provides the first global analysis of the determinants of urban FDI (UFDI). We assemble and exploit a unique database on the location choices of multinational enterprises in urban areas worldwide to investigate the relevance of local, national, and dynamic drivers of cities' international attractiveness. We find that attractive cities are large, productive, endowed with transport infrastructure able to move goods and people within and beyond their borders, abundant in educated people, and embedded in attractive national spaces. Cities combining all these attributes tend to attract service activities. Attractiveness is persistent but can evolve depending on economic dynamism. A variance decomposition analysis indicates that the location choices of UFDI are mainly driven by city‐level determinants, notably transport infrastructure.

Social trust and the location choices of foreign firms in China-The moderating role of formal institution and cultural distance.

The institutional environment has a significant impact on the location of overseas investments by multinational enterprises (MNEs). However, there remain two research gaps. First, fewer studies focused on the impact of subnational regional institutions on the location choices of MNEs. Second, study on informal institutions has been more limited. This study investigates the effect of the informal institution (social trust) in the Chinese subnational region on the location choices of foreign firms and the mechanism of its role. Using the sample of foreign firms' location choices in China from 2008 to 2020 in Orbis Global Enterprise Database, this study finds that social trust positively related to the location choices of foreign firms in subnational regions. Our results also show that this positive effect is contingent on the formal institution and the cultural distance between home and host country. When the formal institution is strong and the cultural distance between home and host country is high, social trust has a more significant positive impact on the location choices of foreign firms in subnational regions. Besides, the results show that cost advantage, information advantage and innovation advantage are important mechanisms for social trust to influence foreign firms' location choices in subnational regions. This study is important for understanding the role of subnational regional informal institutions in influencing strategic decisions of MNEs. At the same time, it has certain guiding significance for governments in attracting foreign direct investment and for multinational enterprises in selecting suitable overseas investment locations.

Populism and FDI Location Choice

In this study, we investigate how populist governments influence the location choice of multinational enterprises (MNEs) in terms of foreign direct investment (FDI). We also examine how experience of MNEs acts as a contingency in this relationship. With a sample of 525,688 observations on FDIs from 2007 to 2019 we find that MNEs are less likely to invest in a country the more its government is considered populist. More internationally experienced firms that already have invested in the target country and that have experience with populist governments are less deterred from uncertainties of populist governments. Overall, our results highlight the specific uncertainties populist governments cause for MNEs’ location choice and that experienced MNEs can better deal with them.

Production location of multinational firms under transfer pricing: the impact of the arm’s length principle

When multinational enterprises (MNEs) separate the geographical location of affiliates, they can shift profits between the affiliates by manipulating intra-firm prices of inputs. We show that if the international tax difference between the parent and the host countries is large, MNEs choose to separately locate their affiliates in the two countries. We also investigate the impact of the arm’s length principle (ALP) on the location choice, which requires that the intra-firm price of inputs should be set equal to the price of similar inputs for the independent downstream firms. The ALP may change the location choice of MNEs, bringing smaller tax revenues to the host country, but greater revenues globally.

When Political Instability Destroys Historical Ties

Although institutional and cultural distance evolve slowly, historical home-host linkages can swiftly wear away due to political shocks. We investigate how shocks related to political instability, i.e. war and regime changes, affect the importance of colonial ties for location choices of multinational enterprises and find that wars and regime changes eliminate the positive effect of colonial relationships on the probability of investment. This implies that multinationals originating from a country with historical ties to the host country face incentives to prevent political shocks, whereas MNEs from countries without such home-host ties might actually benefit from threats to the status-quo.

Tax-Response Heterogeneity and the Effects of Double Taxation Treaties on the Location Choices of Multinational Firms

This paper examines location choices of multinational enterprises (MNEs). We particularly focus on the consequences of double taxation treaties (DTTs) and corporate profit taxes on the probability to choose a location. DTTs have become a key policy instrument used by countries to regulate international tax issues related to the cross-border activities of MNEs. Based on three alternative location choice models, which all allow parameter estimates to vary randomly across firms, we show that firm responses to policy variables are highly heterogeneous. Postestimation statistics suggest that the heterogeneity of parameters is strongly correlated with firm size and effective tax burden, which is consistent with tax-avoidance behavior and provides an explanation for why tax-responses are heterogeneous in the first place. We quantify the (positive) effect of DTTs and demonstrate that the negative tax-responsiveness becomes larger if a DTT is implemented. The latter is evidence that provisions intended to prevent tax avoidance are effective.

Production Location of Multinational Firms under Transfer Pricing: The Impact of the Arm's Length Principle

When multinational enterprises (MNEs) separate the geographical location of affiliates, they can shift profits between the affiliates by manipulating intra-firm prices of inputs. We show that if the international tax difference between the parent and the host countries is large, MNEs choose to separately locate their affiliates in the two countries. We also investigate the impact of the arm's length principle (ALP) on the location choice, which requires that the intra-firm price of inputs should be set equal to that of similar inputs for the independent downstream firms. The ALP may change the location choice of MNEs, bringing smaller tax revenues to the host country, but greater revenues globally.

The Impact of Competition and Consumer Preferences on the Location Choices of Multinational Enterprises

In this study, we argue that when undertaking location decisions, multinational enterprises (MNEs) ought to incorporate their competitors' reactions to such decisions as well as consumer preferences for location, in addition to the more standard cost‐benefit analyses. We view MNEs as networks of activities connected via product and knowledge flows and develop a game‐theoretic, location‐allocation mathematical model. A series of computational analyses leads to competitive outcomes and location choices, where even without an explicit modeling of inter‐region differences, MNEs show strong tendency toward regionally focused location configurations. Importantly, such regionally focused location configurations can take the shape of regionally focused MNEs or of globally dispersed MNEs with regional structures.

Location Strategies of Multinationals from Emerging Countries in the EU Regions

This paper contributes to the current debate in both Economic Geography and International Business on the nature and strategies of Multinational Enterprises (MNEs) from emerging countries (EMNEs). The paper fills a relevant gap in the existing literature by shedding new light on the location strategies of EMNEs at the national and regional level, looking at their investment drivers and systematically comparing them with those of multinationals from advanced countries (AMNEs).The empirical analysis looks at the location choices of MNEs in the European Union (EU-25) regions and unveils that EMNEs follow distinctive location strategies. Their attraction into large regional markets is similar to AMNEs as well as their irresponsiveness to efficiency seeking motives. Conversely, the most knowledge-intensive investments of EMNEs respond mainly to two ‘attraction’ factors: strategic assets (in the form of local technological dynamism) and the agglomeration of foreign investments in the same business functions. In addition, both the national and the regional levels are simultaneously relevant to EMNEs decisions.

Location choice in low-income countries: Evidence from Japanese investments in East Asia

Unlike most existing studies, this paper examines the location choices of multinational enterprises (MNEs) in low-income countries. Specifically, we investigate the location choices of Japanese MNEs among East Asian developing countries by estimating a four-stage nested logit model and a mixed logit model at the province level. Our findings are as follows. First, Japanese MNEs consider Cambodia, Laos, Myanmar, and Vietnam to be host countries different from China and the forerunners of ASEAN. In other words, for Japanese investors, ASEAN forerunners are countries replaceable by China. Second, the mechanics of vertical FDI are more likely to appear in FDIs in low-income countries. For example, rather than the market size of the host country, tariff rates on products from investing countries are more crucial location elements.

Technological Constraints, Firm Heterogeneity, and Location Choice of Multinational Enterprises

AbstractThis paper aims to examine the relationship between the location choices of multinational enterprises and their productivity considering the North–South differences in regard to technological constraints. We find that home firms with the highest level of productivity choose to undertake foreign direct investment (FDI) in the developed countries and they choose to export to, rather than do FDI in, developing countries. This result explains why not many high tech industries exist in developing countries. Using Japanese firm level data, we also confirm that Japanese high tech firms tend to undertake FDI in developed countries, but hesitate to invest in developing countries empirically.

Location choice of multinational enterprises in China: Comparison between Japan and Taiwan

AbstractThis paper explores the location choice of multinational enterprises (MNEs) in China, shedding special light on the role of agglomeration of same‐nationality firms. We examine how this role differs according to firms' productivity. Furthermore, we compare the location choice of Japanese and Taiwanese MNEs in China, taking into consideration that Taiwanese MNEs experience less uncertainty in investing in China due to Taiwan's linguistic and cultural advantages. When considering firms' productivity, we find that less productive Japanese firms prefer to locate close to larger same‐nationality agglomerations while there are no differences in location choices in the case of Taiwanese firms.

Political capabilities, policy risk, and international investment strategy: evidence from the global electric power generation industry

Whereas conventional wisdom holds that multinational enterprises (MNEs) invest less in host countries that pose greater policy risk—the risk that a government will opportunistically alter policies to expropriate an investing firm's profits or assets—we argue that MNEs vary in their response to host-country policy risk as a result of differences in organizational capabilities for assessing such risk and managing the policy-making process. We hypothesize that firms from home countries characterized by weaker institutional constraints on policy makers or greater redistributive pressures associated with political rent seeking will be less sensitive to host-country policy risk in their international expansion strategies. Moreover, firms from home countries characterized by sufficiently weak institutional constraints or sufficiently strong redistributive pressures will seek out riskier host countries for their international investments to leverage their political capabilities, which permit them to attain and defend attractive positions or industry structures. We find support for our hypotheses in a statistical analysis of the foreign direct investment location choices of MNEs in the electric power generation industry during the period 1990–1999, the industry's first decade of internationalization. Copyright © 2010 John Wiley & Sons, Ltd.

Effective Tax Rates as a Determinant of Foreign Direct Investment in Central and East European Countries: A Panel Analysis

Governments in Central and East European Countries (CEEC-5; see Table 16.1) intervene to influence the location choice of multinational enterprises (MNEs) by various measures. They provide incentive packages, fiscal and non-fiscal, and they try to shape various location factors in order to lower production costs for foreign firms. One location factor that figures prominently in actual policy-making as well as in the public debate is the corporate income tax rate. What is at issue therefore is, whether tax-rate cuts are an appropriate policy tool for attracting foreign direct investment (FDI)2 and whether FDI responds significantly to changes of the corporate income tax burden in the CEEC-5.