Foreign Direct Investment Location Research Articles

Motives for foreign direct investment location in Europe and EU enlargement

European Union (EU) enlargement of the mid-2000s is likely to have changed the motives for foreign direct investment (FDI) location between the existing Member States (the EU15) and the new entrants of Central and Eastern Europe (CEECs), but it is poorly understood. This paper uses the framework of Dunning’s eclectic paradigm and data for 35,105 foreign investments in Europe not only to examine if the motives differ between these, but also how they are affected by the enlargement. Three asset-exploiting motives of market, resource and efficiency seeking are explored using a conditional logit model for the location choice. This is separately for greenfield and brownfield FDI, involving new facilities or jobs, where the latter is efficiency seeking from an expansion or a co-location of functions. The paper finds greenfield FDI in the CEECs seeks an export platform for the EU market and a low-skilled workforce but a national market and higher skills in the EU15. Brownfield FDI differs from this for expansions only, for which the EU market is important, reflecting scale economies. Surprisingly, EU enlargement has a much stronger effect on the FDI location motives in the EU15 by increasing the importance of the European market, which is possibly because the CEEC liberalisation was ongoing throughout the accession process. The paper finds evidence that the differences in the motives between the CEECs and EU15 are narrowing over time, but they are pronounced, and it is argued that they will persist.

Agglomeration Effects and Foreign Direct Investment Location Choice: Cross-country Evidence from Asia

Purpose – This study examines the determinants of foreign direct investment (FDI) location choice for Chinese firms, focusing on the agglomeration effect for firms of the same...

Spatial econometric analysis of foreign direct investment and carbon productivity in China: Two-tier moderating roles of industrialization development

The increasing of carbon productivity is crucial to the success of China’s green development goals. Among them, Foreign Direct Investment (FDI) is seen as a potential pillar of achieving these strategic goals. Based on 1998–2016 provincial-level panel data in China, this paper combines influencing mechanisms such as the scale effect, structural effect, technical effect and environmental effect, and constructed a spatial simultaneous equations model of carbon productivity. This study calculated the comprehensive impact of FDI on carbon productivity by using the generalized space three-stage least-squares estimator method (GS3SLS), and further explored the moderating effect of the regional industrialization level by adding interaction items, in order to discuss the turning point of the local government's investment policy. The results showed that: (1) Local FDI has a positive impact on local carbon productivity, but FDI in surrounding areas (SFDI) has a negative impact on local carbon productivity, structural effect is the main reason for the difference; (2) The moderating effect of industrial development does exist. By calculating the threshold of FDI and SFDI, this paper classifies China's industrialization development level into three levels. When formulating and implementing relevant policies to attract investment, the Chinese government should not simply implement the policy on the basis of geographical regions, but should fully coordinate heterogeneity between the introduction of FDI and industrialization development, so as to significantly improve China’s carbon productivity.

The determinants of services FDI location in the UK regions

This paper contributes to scholarly knowledge and understanding of the way in which economic conditions and government policy affect foreign direct investment (FDI) location in the United Kingdom (UK) regions. It does so by exploring their impact on inbound services FDI location in a sample of one of the UK's core (South East England) and four non-core (West Midlands; Wales; Scotland and the North West) regions. Use is made of multiple regression techniques to analyse a set of official, longitudinal data gathered for the period from 1980 to 2015 as a means to this end. The findings offer new insights into the relative influence of the search for markets, efficiencies and strategic assets and government policy over the location of services FDI in all five regions. The resultant implications for future inward investment policy development after the UK leaves the EU are also considered, including the potential benefits of increasing policy variations from region to region.

The determinants of services FDI location in the UK regions

This paper contributes to scholarly knowledge and understanding of the way in which economic conditions and government policy affect foreign direct investment (FDI) location in the United Kingdom (UK) regions. It does so by exploring their impact on inbound services FDI location in a sample of one of the UK's core (South East England) and four non-core (West Midlands; Wales; Scotland and the North West) regions. Use is made of multiple regression techniques to analyse a set of official, longitudinal data gathered for the period from 1980 to 2015 as a means to this end. The findings offer new insights into the relative influence of the search for markets, efficiencies and strategic assets and government policy over the location of services FDI in all five regions. The resultant implications for future inward investment policy development after the UK leaves the EU are also considered, including the potential benefits of increasing policy variations from region to region.

Outward FDI location and economic diplomacy: the case of Greece

This study investigates the effects of national and European Union economic diplomacy action on the stock of Greece's Foreign Direct Investment (FDI) held by 22 destination countries. The results indicate the effect of economic diplomacy instruments on the location of Greece's outward FDI vis-a-vis the respective effect of other determinants. The results are tested for differences across countries with different levels of income and for different levels of economic integration. The findings contribute to the debate on the role of economic diplomacy in international business and on the significance of developing a European economic diplomacy strategy.

Investigating firm heterogeneity in country-of-origin cluster location choice decisions

PurposeThis paper aims to analyse which firm-level characteristics drive their location decisions when investing in a foreign country. Focusing on origin clusters, the authors will study the potential influence of the home country context and, in particular, the impact of firm-level factors, both investor- and investment-related, underlying heterogeneity in their location choice decisions.Design/methodology/approachThe empirical analysis draws on data gathered from mainland Chinese MNEs that have invested in Germany between 2005 and 2013 (269 firms). The authors chose a single host (Germany) and a single home (China) country for their representativeness and for methodological reasons to control for country effects. The authors used a multinomial logit model to assess the effects of the independent variables on the probability that each of the three location possibilities would be selected.FindingsThe results suggest that investors preferring co-location in origin clusters have distinct structural and strategic characteristics. From a more structural point of view, Chinese foreign direct investment (FDI) undertaken by smaller firms and those without prior experience in the EU prefer an area where there are other Chinese investors. From a more strategic perspective, these FDI flows are more likely to tap into industry agglomerations when the investors’ objective is strategic asset seeking, and they have less knowledge-intensive investments.Practical implicationsThe findings may be of great practical value to practitioners and policymakers. Knowledge of the advantages and disadvantages of the types of agglomeration networks can help managers to balance the rewards and risks in their decision-making and to select a suitable development path for their FDIs. For policymakers, an understanding of the structure and formation of different groups of firms in one location and the characteristics of investors who may enter the location can help them to improve their regulatory work and to develop policies to attract investments, thereby enhancing local economic development and community stability.Originality/valueThe research shifts the emphasis of the location choice decision beyond just where to locate toward with whom to collocate. It also contributes to the growing research on emerging market multinationals by providing further insight into understanding of FDI location behavior by firms from emerging economies.

How EMNEs choose location for strategic asset seeking in internationalization?

PurposeBased on the strategy tripod perspective, this study aims to address how emerging economy multinational enterprises (EMNEs) make a strategic decision of choosing a foreign location for their strategic asset seeking and under what mechanism EMNEs make foreign direct investment (FDI) location choice.Design/methodology/approachThis paper first reviews the literature on strategy tripod and strategic asset seeking strategy of EMNEs. Then, six cases of Chinese multinational enterprises operating in manufacturing industry have been introduced, emphasizing on interactions within three dimensions of strategy tripod framework, namely, resource-based dimension, industry-based dimension and institution-based dimension. By triangulating with multiple sources of archival and interview data, this paper identified a conceptual model presenting location choice mechanisms.FindingsBased on a comparative multi-case study, four mechanisms of EMNEs’ location choice when seek strategic asset by FDI within a strategy tripod framework have been revealed. Specifically, EMNEs make their strategic decision of choosing a foreign location for their strategic asset seeking under mechanisms of seeking complementary resources based on industry characteristics; echoing with institutional dimension of home country when exploitation of resource; matching institutional dimension of host country when consider industry fitness; and institutional leveraging combined with understanding of resource and industry dimensions inside strategy tripod.Originality/valueThe findings shed novel insights into the mechanisms under which EMNEs choose their location for strategic asset-seeking FDI. It also broadens the strategy tripod framework by looking deeper into the characteristics of each dimension within a new research context of EMNEs’ FDI location choice.

Impact of Institutional Environment on Inward FDI: A Case of Select Emerging Market Economies

The tremendous amount of foreign direct investment (FDI) flowing into emerging nations has attracted worldwide attention. These economies are at a same stage of development with similar social, economic and other conditions, but their institutional environment can act as a differentiator in affecting FDI location within these emerging economies. So, this article examines the role of institutional mechanisms in influencing their inward FDI by employing broad-based indicators of institutional environment. The article employs panel data regression (fixed effects) to test the impact of institutional indicators and other variables on FDI inflows and stock of 23 emerging economies from 2006 to 2015. Three indices have been constructed for this purpose, using the methodology of principal component analysis and composite index, from 24 institutional variables. All the three indices, representing three institutional pillars turned significant: ‘Rule of law’ (negative coefficient), ‘Regulatory efficiency’ (positive coefficient) and ‘normative institutional environment’ (negative coefficient). This implies that one of the main motivations for foreign investors to make investment in emerging economies is to take advantage of their weak laws, norms and values. But they also seek a basic enabling environment with minimum burdens as far as the efficiency of regulations is concerned.

Dynamic interaction between foreign direct investment and the new urbanization in China

At the macro-national level, foreign direct investment (FDI) can effectively promote the new urbanization in China. However, at the urban level, the interactions between FDI and the new urbanization are still not clear. To answer this question, this study constructs a new urbanization development index system based on a panel data set of 271 cities in China from 2003 to 2014. The weights of 26 secondary indicators are determined by the entropy method, and the spatial and temporal effects between FDI and the new urbanization are analyzed using the Panel Vector Autoregression model. Furthermore, direct–indirect effects of urbanization and that of FDI are respectively studied from short-term and long-term two visual angel. The results show that the FDI inflow is an exogenous motive force for the new urbanization, and the new urbanization provides strong support for attracting foreign capital. However, FDI in the neighboring areas is not conducive to local urbanization, and the urbanization of the surrounding areas will inhibit the local FDI Inflows.

Why Enterprises Do Not Invest in Europe? Management Claims and Countries Conditions in Developed and Emerging Markets

The choice of location of foreign direct investments is still one of the most explored topics in the economic and managerial literature. However, these studies focus on the variables that positively influence the choice of investing in a foreign country but rarely analyze factors that lead to the decision to not invest. While the economic literature considers the decision to invest as a linear process, the organizational approach recognizes complex factors in the decision-making processes. The present study is positioned within this debate. More specifically, the aim is to understand if the variables claimed as threats by managers are really barriers to investments and then if they negatively influence the level of inward FDI in the European countries, with a specific focus on differences between developed and emerging countries. The context analyzed is represented by the 28 countries of the European Union, including a set of 12 variables that were collected and tested through a stepwise regression model. Subsequently, the differences between emerging and developed countries are analyzed by means of cluster analysis. The findings highlight the existence of a mismatching between management claims on FDI barriers and the actual institutional and economic situations in European countries, due to informational and cognitive shortages or the opportunity to provide socially desirable answers. The cluster analysis underlines how managers claim on barriers to FDI seem to have a greater matching with conditions of emerging countries, showing a possible deepened knowledge of these contexts, compared to developed countries.

How firm heterogeneity affects foreign direct investment location choice: Micro-evidence from new foreign manufacturing firms in the Pearl River Delta

This study explores how firm heterogeneity affects the geographic agglomeration and location choice of foreign direct investment (FDI) based on micro -evidence from 3558 new foreign manufacturing firms in the Pearl River Delta, China. Kernel density and categorical multivariate linear regression are integrated to examine FDI location choices. The empirical results confirm that firm location choices are jointly influenced by location factors and firm heterogeneity. Specifically, we find that a firm's location decisions and agglomeration behavior are determined by the interaction between firm heterogeneity and location factors. Although location factors reveal a significant impact on the entry decisions of firms, the location effects are adjusted to some extent, or even change direction, when firm heterogeneity factors are taken into consideration. Investment from different origins via different entry modes and different sectoral composition in the same host location exhibits different nature of clustering, which may be interpreted as different characteristics of interaction between home and host regions in the context of the global economy. Such insights into the heterogeneity of firms with their divergent ways in choosing their locations also echo with the previous discussion on ‘divergent capitalism’. We believe that a better understanding of the impact of firm heterogeneity on FDI location choices at the micro-level can help policymakers formulate more appropriate firm-based policies. Such policies could address the specific preferences of different types of firms.

Vertical Industry Linkages and the Location of Foreign Direct Investment in Poland

We study the determinants of locational choice for new foreign affiliates across Polish regions with special focus on the role of agglomeration externalities using a conditional logit framework and firm-level data from the Amadeus database and a Polish dataset on regional and industry-region characteristics at the NUTS 2 level. The estimation results show that higher local demand agglomeration increases the probability that a foreign parent company founds an affiliate in a certain Polish region, whereas adverse labor market conditions, which manifest themselves in high unemployment and low wage rates, negatively affect the location probability.

Spatial Linkages in FDI Location: Evidence from the Spanish Regions

AbstractThis paper examines the main factors behind the regional location of foreign direct investment (FDI) in Spain, at both the aggregate and sectoral levels, over the 1996‐2013 period. To do so, a panel spatial Durbin model, which allows us to unveil patterns of substitution or complementarity in FDI across regions, is estimated. Our findings reveal that inward FDI in one region is complementary to that in neighbouring regions, a conclusion that is consistent with a complex vertical FDI strategy. Besides, they tend to confirm the hypotheses that FDI exhibits some inertia and is attracted by regions with: (i) large market size; (ii) large surrounding‐market potential; and (iii) high levels of human capital and wages. However, the results cast some doubts on the role played by infrastructure, R&D and regional differences in taxes as key elements in attracting FDI.

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.

Environmental Accounting of Financial Development and Foreign Investment: Spatial Analyses of East Asia

This paper aspires to examine the environmental effects of financial market development (FMD), foreign direct investment (FDI), and trade openness on the CO2 emissions per capita along with the environmental Kuznets curve (EKC) hypothesis in six East Asian countries from 1991–2014. For this purpose, spatial econometrics is applied to consider the spillover effects from neighboring countries. The results of the study corroborate the spillover effects from neighboring countries’ CO2 emissions per capita, FMD, FDI, and trade openness, and the EKC hypothesis is proven true in this region. Local FDI inflows, trade openness, and energy intensity are found to be responsible for local environmental degradation. Local FMD has an insignificant environmental effect, but neighboring countries’ FMD has contributed to the local CO2 emissions per capita. Further, positive (negative) environmental spillover effects are found from neighboring countries’ FDI (trade openness).

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.

Determinants of Intra-Region and Extra-Region Foreign Direct Investment Inflow in ASEAN: A Spatial Econometric Analysis

In this paper, we explore the dominant forms of foreign direct investment (FDI) (horizontal, vertical, export-platform, and complex vertical) in ASEAN countries. To account for the heterogeneity in FDI forms according to their origins, we examine separately extra-ASEAN and intra-ASEAN FDI in ASEAN countries. Using macro-level annual data covering nine countries over 1999–2011 and spatial econometric models, we find that the significance and the signs of the coefficients for the determinants of FDI and of spatial interactions provide an indirect way to test the dominance of particular forms of FDI over others. Our results suggest that the location of extra-ASEAN FDI is affected by host country characteristics (such as market size, infrastructure quality, political stability, trade costs) and by FDI in neighboring countries. Then, extra-ASEAN FDI inflows seem to be dominated by complex vertical FDI. In contrast, the location of intra-ASEAN FDI is affected by a host country’s political stability and market size, but also by the market potential of neighboring markets, suggesting that intra-ASEAN FDI inflows are dominated by export-platform FDI. The significance of spatial interactions for both origins of flows warrants the acceleration of economic integration between ASEAN countries to continuously attract FDI.

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.

Interlinkages between FDI Inflow and Economic Growth

The paper investigates into the connection between foreign direct investment (FDI) on the one hand and economic growth (GDP) on the other, over a long period of time, almost half a century, from 1970 to 2017. The key insights derived from this study are, firstly, that there is long run association between FDI and economic growth, secondly, FDI inflow causes and affects economic growth, and finally that economic growth does not spur FDI at national level. However at the state level, economic growth plays pivotal role in the location of FDI which implies that the selection of state is done on the basis of economic growth, that is Gross State Domestic Product (GSDP). Therefore in the long run and at the national level, policies should be directed towards the encouragement of FDI inflow, in order to boost economic growth. States should enhance their infrastructure and economic growth in order to enhance their share in total FDI.