Foreign Direct Investment Location Research Articles

Location choice of foreign direct investment in technical KIBS in China: impact of human capital and intellectual property rights protection

PurposeThis study considers the “technology creation” characteristic of technical knowledge-intensive business services (T-KIBS) and examines how human capital and intellectual property rights (IPR) protection affect the location choice of foreign direct investment (FDI) in China for two types of T-KIBS: (1) information transmission, software and information technology (ICT) services and (2) scientific research and technology (SCI) services.Design/methodology/approachOur empirical analysis is based on panel data on 22 Chinese provinces from 2009 to 2017. We use the generalized method of moments estimation for the regression analysis.FindingsFDI in ICT services prefers regions with high human capital, while FDI in SCI services favors regions with good IPR protection.Research limitations/implicationsFuture research could use more comprehensive data and qualitative interviews to enhance the findings.Practical implicationsThese findings provide a foundation for China’s future policy on attracting FDI into T-KIBS, especially in areas related to human capital and IPR protection.Originality/valueThis study bridges the research gap on the FDI location choice of T-KIBS in China by clarifying the influences of human capital and IPR protection and providing theoretical support for the location choice of T-KIBS FDI.

Quantifying adaptation costs in sequential FDI location choices: Evidence from German firms

Initiating foreign direct investment (FDI) is expensive for multinational firms due to the need to adapt to new business practices, ethical norms, and regulations in a foreign country. This paper examines how such adaptation costs affect firms' FDI decisions in current and subsequent periods. We develop a dynamic structural model of how firms make sequential decisions regarding where to invest. Using unique data covering all German firms' FDI from 2002 to 2009, we estimate the model that allows for country-specific adaptation costs and firms' heterogeneous preferences for location attributes. The estimation results suggest that the adaptation costs are statistically and economically significant, ranging from 0.9% to 22.4% of a firm's average expected discounted profits. If adaptation costs were completely subsidized, firms' FDI location choices would change drastically. Moreover, the average expected discounted profit would increase by 10.9%, not only because of the reduction in adaptation costs but more importantly, due to better matching between firms and locations.

Host‐country terrorism and outward foreign direct investment location choice of Chinese multinational firms: The moderating roles of state ownership and immigrant influence

AbstractThis study employs a novel approach based on real options theory to explore how host‐country terrorism influences the location decisions of companies seeking to invest overseas. Using data for publicly listed firms in China that engaged in outward foreign direct investment (OFDI) between 2008 and 2020, this paper reveals that the severity of host‐country terrorism negatively affects the flow of OFDI from Chinese firms to that specific country. Notably, this adverse impact of host‐country terrorism on OFDI is less pronounced for state‐owned enterprises (SOEs) compared to non‐SOEs. Furthermore, the extent of immigrant presence in the host country acts as a mitigating factor against the negative influence of host‐country terrorism on firms' OFDI decisions. A significant contribution of this article is its pioneering examination of the intricate connection between extreme risks such as host‐country terrorism and the firm‐level OFDI location choices. The insights derived from this study can play a crucial role in assisting companies in bolstering their strategies for risk mitigation and security when venturing into foreign markets. Beyond its practical implications, the findings also hold theoretical value, offering a deeper understanding of how a country can maintain a resilient and diversified international economic order, fostering stable trade relationships, and facilitating high‐level engagement with the global economy.

Faraway Hills May Not Be Greener; Can Ireland Maintain Its Competitive Advantage With a 15% Minimum Tax?

With its attractive 12.5% corporate tax rate, Ireland would seem to be most heavily impacted by the European Union’s decision to adopt the Pillar Two 15% global minimum tax. With implementation looming in 2024, questions have arisen about whether Ireland will be able to maintain its competitive advantage, even with the higher tax rate. In this Talking Points, Anna Crowley examines the steps the Irish government has taken to ward off any ill effects of the rate hike, as it seeks to maintain its position as an attractive location for foreign direct investment.

Temperature anomalies and foreign direct investment: City-level evidence from China

We use temperature anomalies, calculated as temperatures deviating from historical average temperatures, as proxies of climate change, and investigate the impact of climate change on foreign direct investment (FDI) in Chinese prefecture-level cities. The empirical results indicate that increases in temperature anomalies have a significant and negative cumulative effect on FDI, and that the impact lasts for only two years. Although the impact is not heterogeneous between rich and poor cities, FDI in rich cities responds more quickly to temperature anomalies, and the impact lasts longer in rich cities. We provide the following two possible channels through which temperature anomalies affect FDI: economic development and demographics. Our results are robust to a series of tests. We provide evidence of the relationship between climate change and economic activities from a new perspective of foreign investment, highlight the influential channels and confirm the role of climate change in determining FDI locations.

Chinese SMEs’ location choice and political risk: The moderating role of legitimacy

International business studies show that multinational enterprises generally invest in locations with fewer political risks, but that this may not always apply to emerging-market multinational enterprises, due to the specific characteristics of their home countries. In this paper, we examine the impact of political risk on the location decisions of Chinese small and medium-sized enterprises (SMEs), and explore the legitimacy of firms from China in different host countries as a moderator of the relationship between political risk and location choice. Our empirical investigation is based on an original database of 617 foreign direct investment (FDI) location-choice decisions made by 240 Chinese SMEs between 2006 and 2017. The results show that political risk deters Chinese SMEs from choosing certain locations, but political and economic legitimacy positively mitigate this relationship. Combining the political institutions approach and legitimacy-based view of political risk, we contribute novel insights into the role of legitimacy of firms from the same country of origin in emerging market SMEs’ strategic choices of FDI location.

Trade and value chain participation: Domestic firms and FDI spillovers in Africa

AbstractData on the location of foreign direct investment (FDI) projects within and across African nations are combined with firm‐level survey data and information on sectoral input–output relationships to assess what types of FDI are more likely to influence participation in global value chains (GVCs) and to investigate the relationship between FDI and the performance of proximate domestic firms. Firm‐level analysis finds evidence of vertical spillovers from exposure to FDI, mainly in the manufacturing sector: domestic firms located near FDI projects that offer potential supply or demand linkages are more likely to engage in trade through imports or exports. Proximity to FDI projects in the same sector (horizontal linkage) is less likely to affect trade or GVC performance of domestic firms. Both vertical and horizontal FDI linkages are associated with higher labour productivity and other dimensions of performance.

Geopolitical risk and green outward foreign direct investment location choice: evidence from Chinese listed companies.

Green outward foreign direct investment (OFDI) has become an important driving force for sustainable economic and environmental development. However, increasing geopolitical risks (GPR) pose a critical obstacle to the green OFDI of multinational enterprises. Drawing upon international production eclectic theory, we explore the impact of GPR on the green OFDI of Chinese enterprises and discuss the moderating role of firms' green technological and political capabilities including different moderating effects of these types of capabilities in the Belt and Road Initiative (BRI) and non-BRI countries. Using the BvD Cross-border Investment database and annual reports of Chinese A-listed companies, we constructed a unique micro-firm overseas green project dataset in 2013-2020. Negative binomial models were used for empirical testing. The GPR has a significant negative impact on Chinese enterprises' green OFDI location choices. The impact intensity varies with the firms' green technological and political capabilities. In addition, compared with non-BRI countries, the role of firms' green technological capability in BRI countries is stronger, while firms' political capability is not significant. These findings expand research on the relationship between GPR and green development by emphasizing the differential impact of GPR on enterprises' green OFDI location choices under different firm capabilities and bilateral country relations.

State-level Location Determinants of Japanese Automotive FDI in Mexico

Foreign Direct Investment (FDI) location theories highlight the regional factors that influence the location and spatial distribution of the investment project. The study employs a state-level spatial panel econometric model to empirically contrast the main location factors that influence the spatial distribution of Japanese companies. The main results indicate that state characteristics related to the presence of infrastructure, lower wages, agglomeration, and development of the automotive industry influence the presence of Japanese automotive firms in Mexico. The results also highlight the presence of negative spatial externalities for the wages, population, industry agglomeration, and education variables. This shows that neighboring states compete for the arrival of Japanese automotive firms and spatial effects are present. Positive spatial externalities were observed from the market size variable, which can reflect the presence of production networks in the automotive industry, especially for the case of Japanese firms.

THE EFFECTS OF CULTURAL DISTANCE AND INSTITUTIONS ON FOREIGN DIRECT INVESTMENT CHOICES: A RESEARCH OF TURKEY & CHINA

Global changes in social, cultural and economic spheres and advances in technology and communication have made the world a global market where borders no longer exist. The importance of foreign investment has become undeniable with the emergence of the concept of foreign investment for developing economies. Due to its direct impact on the global market and its economy in transition, China is the focus of this research. The research aims to determine the interplay of variable factors influencing foreign direct investors and investment location choices with cultural distance and investment models, and to use the associated evaluation as a guide for investors. In this study, qualitative research methods are used to measure the impact of the variable factors that determine the hypotheses of the study on foreign direct investors and to evaluate the findings. In this study, designed with the technique of phenomenology, in-depth interview is used as the method of data collection and data analysis is done through descriptive analysis. All the research and interviews have revealed that FDI is very responsive to institutions and cultural distance. Moreover, agglomeration is the strongest determining factor for FDI in the Chinese market. The reason these factors encompass the sectoral aggregate are not the strongest factors is that agglomeration is the most important finding. This study is a useful guide for developed and developing countries as well as for the strategic plans of local and national institutions.

Pros and Cons of Ghana as a Destination for Foreign Direct Investment

This study presents an in-depth analysis of foreign direct investments (FDI) determinants in Ghana. Following the typology of Dunning’s motives of FDI location, they are categorised under the resource-seeking, market-seeking or efficiency-seeking FDI they foster. Literature on FDI drivers in Africa was considered and based on the tendency and/or comparison of the most recent official data (2000-2022), the pros and cons of such determinants were identified. The analysis reveals that Ghana presents a mostly favourable profile to attract resource-seeking and market-seeking FDI but a mixed situation in the determinants of efficiency-seeking FDI. This study adds to the FDI literature by categorising the drivers under Dunning’s motives of FDI and studying the evolution of these factors in a specific developing African country (Ghana) in order to reveal the country’s performance with the determinants. Results show that Ghana’s trend is very positive and can become an attractive market for foreign companies. And government and policymakers should continue in the trend of improving their factors to attract and retain foreign investment.

Institutional difference and foreign direct investment location choice: Evidence from China

AbstractResting upon an extensive data set on foreign invested enterprises (FIEs) in China, we investigate the role of institutional difference in determining the locational choice of foreign direct investment (FDI). Estimation results using firm‐level discrete choice model suggest that FIEs from source countries that are more remote institutionally from the Chinese mainland exhibit a higher degree of sensitivity to regional economic institutions in their choice of FDI location. Furthermore, we find that FIEs coming from countries with better institutions than China are more sensitive to the institutional difference. Interestingly, we find that the deterrent effect of institutional distance on FDI entry is mitigated for FIEs coming from countries with more ethnic Chinese individuals in their overall populations.

Back to roots: TMTs’ country-specific experience, FDI preference, and political center favoritism

This paper investigates how the origin experience and work experience of top management teams (TMTs) affect foreign direct investment (FDI) decisions of multinational enterprises (MNEs), drawing on learning theories and social capital view. Using data from Standard and Poor’s firms operating in China during 2014–2016, we find that TMTs’ country-specific origin experience and work experience have a positive impact on the extent of FDI in the focal country, while we find that the former has a greater impact. Consistent with the consideration of being deeply anchored in the specific country, we find that TMTs with origin experience, relative to work experience, are more likely to choose FDI locations in the political center. We further find that the effect of origin experience on the extent of FDI and the preference for political centers will be more pronounced for MNEs with low levels of profitability. This study contributes to the literature on international business and provides practical implications for international expansion.

Intellectual property rights policy and foreign direct investment: A quasi‐natural experiment from China

AbstractOver the past 40 years of reform and opening up, China has attracted a large number of foreign investment. However, because of China's weak intellectual property protection environment, it is difficult to protect the intellectual assets of transnational enterprises, which will affect their investment decisions to some extent. In order to optimize the intellectual property system and improve the intellectual property environment, national intellectual property demonstration city policy was proposed in 2012 to improve the institutional environment. To explore the impact of national intellectual property demonstration city policy on foreign capital inflow, we explore the relationship between national intellectual property demonstration city and foreign direct investment (FDI) using the multi‐period differences‐in‐differences (DID) method based on city panel data of China from 2003 to 2019. Results shows the following: (1) Compared with non‐demonstration cities, national intellectual property demonstration cities are profit to FDI promotion. If a city is rated as a national intellectual property demonstration city, local FDI will increase by 5% on average. After a series of robustness tests, the conclusion is still tenable. (2) We find that the national intellectual property demonstration city policy has obvious urban heterogeneity. The effect of national intellectual property demonstration city policy on the increase in FDI is more significant in central cities, western cities, and key cities. (3) The mechanism test shows that national intellectual property demonstration city policies have a positive effect on FDI through increasing the government's strategic expenditure on intellectual property, improving urban technology innovation capacity, optimizing human capital structure, and promoting the marketization of cities. Therefore, China should continue to implement the policy of national intellectual property demonstration city, especially increasing the number of national intellectual property demonstration city in key cities, central cities, and western cities. On the one hand, these findings can help government evaluate the attractiveness of demonstration cities for FDI. On the other hand, it also provides relevant policy enlightenment for the Chinese government to select appropriate demonstration cities and further refine and implement the national intellectual property demonstration city policies.

Impact of China’s Local Government Competition and Environmental Regulation on Total Factor Productivity

In the transition of China’s economy toward high-quality development, it will be increasingly important to coordinate the relationship between local government competition, environmental regulation, and the transformation of the economic growth mode. To explore the impact of local government competition and environmental regulation on total factor productivity (TFP), in this study empirical analysis models were established using panel data of 30 provinces in China from 2001 to 2017. Local government competition was measured from the perspectives of foreign direct investment (FDI), fiscal expenditure, and tax. The results show that local government competition has a positive impact on the improvement in TFP. Taking environmental regulation into consideration, the impact of local government competition on TFP is weakened. Furthermore, under the current intensity of environmental regulation, local government fiscal expenditure competition and tax competition both lead to improvement in TFP, while FDI competition has the opposite effect. This paper explores the heterogeneity of the impact of local government competition and environmental regulation on TFP under different local government competition levels. Under the influence of environmental regulations, local government FDI competition has a negative impact on the improvement in TFP, particularly in “low” FDI competition areas. Local government fiscal expenditure competition has a positive impact on the improvement in TFP, particularly in “low” fiscal expenditure competition areas. The current level of local government tax competition has a negative impact on the improvement in TFP in “high” tax competition areas, whereas it has a positive impact on the improvement in TFP in “low” tax competition areas.

Institutional Quality, Foreign Direct Investment, and Regional Integration: Empirical Evidence From CEN-SAD

This study investigates the institutional quality effects on the foreign direct investment (FDI)–regional integration nexus in the Community of Sahel-Saharan States (CEN-SAD). The novelty of our approach extends the regional integration theory in Africa by employing the Africa Regional Integration Index (ARII) and utilizes a dynamic panel data model based on the one-step system generalized method of moments (SYS-GMM) estimation to explore the institutional quality effects on the relationship between FDI location advantages and inflows and dimensions of regional integration. Our study highlights macroeconomic integration as the strongest indicator of regional integration as well as the most crucial determinant of FDI in CEN-SAD. We also discovered that FDI inflows into the lower-middle income countries (LMICs) were only slightly higher than in low-income countries (LICs). Our results infer that institutional reforms augment FDI location advantages and enhance FDI inflows irrespective of the level of integration in the Community.

미국의 인플레이션 감축법이 우리나라 전기차 공급망에 미치는 피해의 최소화를 위한 협상대책

The US Inflation Reduction Act is expected to cause significant damage to the electric vehicle industry in Korea and EU. This study focuses on negotiation measures between Korea and USA to minimize damages related to the supply chain of the automobile industry, which is expected from the implementation of the IRA. The IRA is ultimately intended to build a US-centered electric vehicle production ecosystem, and from the standpoint of the Korean automobile industry, it is necessary to move away from relying on China for major raw materials for batteries so far, and to restructure or significantly adjust the supply chain. Regarding the IRA, both the Korea-US negotiations and the Korea-China negotiations have important meaning considering the future growth engines of electric vehicles and batteries. In negotiations with the United States, it is desirable for Korea to recognize that the nature of the issue is derived from the multilateral economic hegemony of the United States, and to engage in negotiations based on principle, that is, a problem-solving attitude that excludes political and diplomatic relations with both the United States and China. For the US, it is desirable to pursue a strategy that maximizes the actual benefits that can be obtained from local foreign direct investment rather than focusing on the application of exceptions to the IRA Act. If Korea fully accepts the US position on the IRA and makes a decision against China’s interests, there may be a threat of retaliation from China, and we must prepare for this at various levels.

Urbanization diseconomies in China: roles of temporary migrant workers in foreign direct investment location

This paper investigates whether temporary migrant workers still attract foreign direct investment (FDI) in China nowadays after they played a strong magnet role for FDI in the last century. This paper tests the hypothesis that foreign firms reduce investments to avoid urbanization diseconomies from temporary migrants when China is experiencing rapid urbanization in the 2000s, with the urbanization rate raised from 36% in 2000 to 59% in 2017. This research employs spatial statistics and analyses to examine the change in the spatial inequality of temporal migrant workers and FDI. This research also uses regression models to investigate whether temporary migrant workers still attract foreign direct investment (FDI) in China nowadays. Temporary migrants are increasingly concentrated in the Pearl River Delta, the Yangtze River Delta, and the Bohai Rim Region of the eastern region, and Chengdu in the western region. The results indicate that a one-person increase in temporary migrant workers is associated with 259 dollars decrease in FDI, suggesting that FDI might reduce with increased migrants to avoid urbanization diseconomies from these cities, helping policymakers develop urbanization and migration policies to optimize labor allocation and promote industrial upgrading, developing peripheral cities.

Economic integration and FDI location: Is there a border effect within the enlarged EU?

AbstractThis paper examines how integration affects Foreign Direct Investment location in relation to a newly internalised border. It focuses on the fifth European Union enlargement that integrated the Central and Eastern European Countries. Using a spatial autoregressive model, 35,103 FDI location decisions are analysed for Europe at a NUTS-2 regional level over 1997–2010. It finds no distance effect in FDI location prior to enlargement, but after this time FDI is 37% higher in the CEEC regions that are contiguous with the newly internalised border. This is not explained by a national border effect that occurs throughout the union, nor by a drop in FDI in the border regions of the old Member States, but rather it is consistent with improved market access from the removal of the border checks. Along the internalised border it amounts to an extra 60 FDI projects and 13,600 gross jobs per annum, which is up to 2000 investments in the long-run. The results have implications for economic development and cohesion of the enlarged union.

Doe technological capabilities matter for Moroccan FDI location choice in African countries?

Our paper investigates the effect of digital transformation and the technological capabilities of African countries on Moroccan foreign direct investment location choice, using the Networked Readiness Index (NRI). To this end, we used the estimation methods of FMOLS and EGLS (Cross-section SUR), with panel data of 14 sub-Saharan countries over the period 2007-2020. We concluded that the effect of technological capabilities on foreign direct investment location choice takes a U-shape quadratic form. However, the impact of digital transformation remains almost non-significant due to the positioning of African countries in the Average-trap. Our paper contributes to the literature framework by considering the three motivations of FDI, market-seeking, efficiency-seeking, and technology-seeking. Furthermore, we use the NRI index as an innovative and synthesised measure of technological capabilities and digital transformation. The study constitutes an insightful policy implication for decision-makers in charge of FDI attractiveness in host countries having average scores of technological capabilities.