Foreign Direct Investment Location Research Articles

Explaining variability in the investment location choices of MNEs: An exploration of country, industry and firm effects

This paper examines the variation in foreign direct investment (FDI) location decisions of European multinational enterprises (MNEs.) An innovative empirical approach is applied to a new data set which contains over 15,000 individual FDI location decisions in 25 European countries over a 17-year period and combines country-, industry- and firm-level factors. The empirical results show that the responsiveness of FDI location choices to country-level factors is heterogeneous both across sectors and across firms of different characteristics as well as unobserved factors. For example, the results show that the importance of market size increases with investing firm’s size and skill intensity, while proximity between countries, as well as cultural and linguistic ties are more important for smaller firms.

The determinants of FDI location choice in China: a discrete-choice analysis

ABSTRACTThis study addresses two questions: What are the determinants of foreign direct investment (FDI) location choice in China? What are the factors that determine investors’ choice between ‘Economic zones’ in China on one hand, and ‘other cities’ of China on the other hand? This study shows that FDI location choice is sensitive both on the endowment conditions in different regions/cities/economic zones in China as well as on the country of origin of the FDI. Based on a data set of 1218 observations, the results of the binary logit regressions indicate that the protection of intellectual rights, agglomeration economies, investments in education and gross regional product affect the location choice of FDI in China. This choices, however, varies depending on the origin of the FDI. Policy makers can use these findings to channel FDI to targeted regions/ cities.

The Research About Outward Foreign Direct Investment Location of China

With the opening reform of China, more and more firms start to invest in foreign countries. This paper has a brief summary of the international investment theory and reviews the FDI location research of scholars at home and abroad. The statistics are adopted from 43 countries from 2003 to 2011, and then we have an empirical study of the OFDI location of China from the angle of the influence of the fuel, the GDPP, the institution and the trade between the two countries. The conclusion is that China prefers developed countries with good resource and poor institutions and developing countries with abundant resources and good institutions.

Determinants of Foreign Direct Investments in Transition Economies: Case of Commonwealth of Independent Countries

While there has been voluminous research on the determinants of FDI for developed and developing countries, little has been done on this issue for transition economies, especially, for the Commonwealth of Independent States (CIS) countries. the present paper examines the determinants of inward Foreign Direct Investment (FDI) flows in the CIS during 1995–2010. the results of empirical analysis using panel data models, conducted with the purpose of identifying the factors that determine the motivation and decision of multinational companies (MNC) to invest in CIS economies, show that regardless of the presence of high investment risk in transition economies, the choice of FDI location always depends on a preliminary analysis of countries’ advantages (FDI stock, market size, abundance in natural resources) and disadvantages at macro level (fiscal imbalance and inflation). These pre‑existing conditions can always roughly predict the type of FDI (resource-seeking, market‑seeking, efficiency-seeking).

Natural resource-seeking intent and regulatory forces

PurposeThis study aims to investigate how natural resource-seeking as a type of strategic intent influences foreign direct investment (FDI) location choice. Grounded in the strategic intent approach and institution theory, the authors developed an interactive conceptual framework by integrating natural resource-seeking intent (NRI) with regulatory institutional factors.Design/methodology/approachThe authors developed an interactive conceptual framework by integrating NRI at a firm level with regulatory factors of governmental support, political risk and economic freedom at country level. Using empirical data from a sample of 137 Chinese outward foreign direct investment (OFDI) projects in 19 Asian countries, statistical analysis was conducted using a conditional logistic regression technique.FindingsEmpirical findings from our study suggest that NRI has a strong influence on OFDI location choice of the Chinese firms. More importantly, the results demonstrate that influence of NRI on location choice is contingent on the regulatory forces both in the home and host countries settings. NRI is more likely to influence FDI location choice when government support from the home country is stronger and/or when political risk in a host country FDI is higher.Originality/valueThis is an empirical-based original study, and it contributes to the literature in several ways. First, the study enriches the strategic intent approach by demonstrating the contingency conditions from regulatory factors, especially home government support on a firm’s pursuit of NRI. Second, the study provides an explanation for the behaviour pattern of Chinese OFDI regarding their response to political risk in a host country. Third, the study demonstrates the influence of “institutional embededness” on the firm’s strategic intent. Managerial and policy implications are also discussed.

The joint effect of investment motives and institutional context on Russian international acquisitions

PurposeThe purpose of this paper is to advance knowledge about factors that influence the location of Russian foreign direct investments. In particular, it focusses on the role of institutional distance (represented by corruption perception distance, political distance and cultural distance) as a moderator of the relationships between traditional investment motives and the number of M&A deals made by Russian companies in a specific country.Design/methodology/approachThe analysis is conducted on panel data of Russian cross-border M&As launched in 46 countries during the period 2007-2013. The final data set includes 322 observations. Due to the nature of dependent variable and the results of pre-tests, negative binomial regression is used in the main analysis.FindingsThe key finding of the study reveals the importance of institutional distance, in particular, the moderating effect of different dimensions of institutional distance on the relationships between internationalization motives and the number of Russian M&As. Corruption, political and cultural differences show different effects in terms of both direction and strength, but all three were found to be significant.Research limitations/implicationsThe major concern stems from the type of secondary data used in the paper. This indicates the necessity to improve data collection methods which could allow for better transparency of Russian foreign investments, would facilitate more sophisticated research and probably more accurate business forecasts.Originality/valueBy conducting a systematic examination of Russian cross-border M&As the authors contribute to the literature on emerging markets firms by addressing the important yet under-researched domain of Russian foreign direct investments. Building on the macroeconomic and institutional logic proposed in this study, future research on Russian cross-border activities could add to the understanding by providing more generalizable and critical evidence. The study provides a point of departure from prior studies on Russian outward FDI which the authors hope to inspire future research to further analyze the drivers of Russian M&As and foreign investments in general.

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.

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.

Regional Determinants of FDI Location in Vietnam

This paper examines empirically determinants of foreign direct investment (FDI) location in Vietnam. Based on a panel dataset of 63 provinces and cities in Vietnam from 2008 to 2012, linear regression models for panel data (fixed-effects and random-effects) and negative binomial models are applied in analysis. The empirical evidence confirms the significant impact of market potential, labour cost, labour quality, infrastructure, provincial policy effectiveness, and the previous year’s FDI concentration on FDI allocation between provinces and cities in Vietnam. Also, market potential and wage rate are statistically shown to affect the size of FDI projects. Moreover, estimation results suggest that provinces with higher FDI accumulation seem to create a dispersion force to new foreign investors and FDI between regions in Vietnam in the form of efficiency-seeking FDI.

Brexit and FDI

The potential for a departure from the EU to undermine the UK's attractiveness as a location for Foreign Direct Investment (FDI) is often cited as one of the key risks were the UK to leave the EU. In weighing up the threat to FDI posed by ‘Brexit’ we assess the net gain from inward investment and the role played by EU membership in attracting FDI. In theory, FDI benefits the economy via lower interest rates, higher wages for workers and ‘spillover’ benefits boosting economy‐wide productivity. But the evidence for these benefits is ambiguous. And FDI has potential drawbacks. These include an adverse effect on the tradeable sector, reflected in a wider current account deficit, the potential to ‘crowd out’ investment by domestic firms and the fiscal cost of subsidies paid to inward investors. That almost half of FDI in the UK comes from other EU countries suggests that EU membership is not the only driver of foreign investment in the UK. Other factors include the UK's business friendly environment, as reflected in global competitiveness surveys, and a relatively deregulated labour market. Of perhaps most importance is the lure provided by the UK's large domestic economy. 80% of FDI in the UK is in sectors where sales to the EU account for less than 10% of total demand. However, FDI in manufacturing does look vulnerable to Brexit, given the importance of the EU market. Granted, manufacturing accounts for a modest share of UK FDI. But to the extent that FDI boosts productivity, a loss of inward investment in this sector is likely to come at a disproportionate cost. Our modelling suggests that in a worst case Brexit scenario, the stock of FDI could ultimately be 7% lower relative to the UK remaining in the EU, potentially knocking around ½% off the level of GDP.

Regulation as Country‐Specific (Dis‐)Advantage: Smoking Bans and the Location of Foreign Direct Investment in the Tobacco Industry

This paper seeks to examine the relationship between smoking bans and the propensity of tobacco firms to engage in foreign direct investment (FDI). Using international business theory based on the firm‐specific advantage/country‐specific advantage (FSA/CSA) matrix, the authors show that, contrary to what one may expect, smoking bans at home are an important institutional intervention, reducing the propensity for firms to engage in FDI, even to countries without a ban themselves.

Does location choice affect foreign subsidiary success in India? An empirical study based on Porter's diamond model

Since India began to liberalise its economy in 1991, the country has become increasingly attractive as a location for foreign direct investment (FDI). However, FDI is distributed very unevenly across the country. While, for example, the state of Maharashtra accounts for 34% of all FDI inflows into India, other states like Assam with 0.1% hardly attract any FDI. The differences are even larger when considering FDI disparities on a district level. Despite this imbalance, academic studies on location factors driving FDI success are lacking. In this study we investigate the factors that determine the degree of subsidiary success in India. Based on Porter's diamond model we develop five hypotheses and test them against a sample of 113 foreign firms. Our data show that subsidiary success is predominantly determined by the availability of human capital. A significant influence is also revealed for the level of governmental regulations and the availability of suppliers. Conclusions are drawn for management and policy makers as well as for theory building.

Local human capital formation and optimal FDI

ABSTRACTThis paper lends both theoretical and empirical support to the notion of optimal foreign direct investment (FDI) levels. It does so by uncovering an inverted-U-shaped relationship between FDI and human capital formation. The optimality of a particular FDI inflow depends on the educational incentives induced by FDI on the local, heterogeneous population. Our estimates confirm the significance of a positive (linear) and a negative (non-linear) impact of FDI stocks on tertiary schooling, which are exclusively relevant in developing countries.

The Determinants And Structural Change Of FDI In China A Study Based On City-Level Panel Data

As one of the important developing countries, China has experienced a tremendous amount of economic growth in the past 30 years. This in turn has attracted a huge amount of foreign direct investment (FDI) into the country. However, according to past literature, FDI location is imbalance in China. Building upon this finding, this paper attempts to identify factors affecting the location determinants of FDI in China. By introducing spatial variable into the analysis, this paper measures the agglomeration effect of a city level data. The results show that the spatial variable (market potential factor), plays a significant role in FDI flows. Also I find that previous FDI flow, market potential factor, infrastructure construction, government preferential policies and coastal location can attract FDI flow. While higher wages and education level effects are not clear. By separating the data into two sub-sample periods (1996-2002 and 2003-2008), I find that in response to the transformation of the economic situation, foreign investors shift their investment direction into regions with high education and high income level. This observation is different to previous studies. This study provides deeper perspective on the factors that attract FDI flows to China, and how the transformation of the economic environment change the direction of FDI flows.

Is Poland Still Attractive for Foreign Investments?

Abstract Since the economic transition Poland has faced many changes. Accession to the European Union improved the Polish economy and made it more attractive for foreign investments. Since 2004 Poland has been one of the major destinations of FDI in East and Central Europe Countries. Also during the global economic crisis Poland was a good location for foreign capital. The main aim of this article is an attempt to assess whether Poland is still attractive for the location of foreign direct investment. This article is a preliminary study. It is based on statistical analysis describing changes in foreign capital flows in Poland and its position in relation to other European Union countries. Results show that the position of Poland on the map of foreign investment has dramatically changed.

The Impact of South-South Trade Agreements on FDI

The integration of emerging markets into the global economy is heavily promoted by foreign direct investment (FDI) inflows. Within the factors driving the location of FDI, regional trade agreements (RTAs) become increasingly relevant for emerging markets. We explore the impact of South-South trade agreements on FDI by dynamic panel models. The MENA countries are compared to the better performing regions in Latin America and Southeast Asia. Several striking results emerge from the analysis. First, agglomeration effects are weaker for the MENA region. Second, the impact of the RTA is important. However, RTAs do not generally rise the attractiveness of the region for foreign investors, as the effect interacts with business-friendly regulations. Third, financial deepening in the host country is a crucial factor, often again in combination with the institutional framework. Furthermore, institutional conditions may not be relevant per se, but only in terms of its interaction with the macroeconomic determinants.

Impact of Double Taxation Treaties on Inward FDI in Latin American and Caribbean Developing Countries

This study strives to assess the impact of double taxation treaties on FDI inflows in 15 Latin American and Caribbean developing countries from 1983 to 2013. There are two objectives of double taxation treaties. The first one is to eliminate the global double taxation, and the second is to barricade the international tax dodging. If we look at the first objective of double taxation treaties (DTTs), it encourages foreign direct investment (FDI) but keeping in view the second objective, it discourages FDI. Both effects can possibly cancel the effect of each other, leaving DTT as an insignificant factor. Previous literature has shown positive, negative and no effect of DTTs on FDI inflows. Therefore, empirically it is an open question that needs further exploration. This study by utilising other conventional FDI determinants such as market size, development level, trade openness and human capital, has empirically shown that DTTs have no effect on the FDI inflows. These countries instead of DTTs seem to be more dependent on some other FDI location pull factors, for example bigger host market, development level, trade openness, the exploitation of their natural resources, improvement of services and manufacturing sector etc. for drawing in foreign direct investment

Spatial inequality of foreign direct investment in China: Institutional change, agglomeration economies, and market access

The spatial inequality of foreign direct investment (FDI) can intensify uneven economic development. As globalization and economic transition proceeds, foreign investors are changing their behaviors in FDI location, based on institutional change and agglomeration effects. In order to reduce the inequality, this research employs spatial statistics and analyses to examine the change in the spatial inequality of FDI among regions and among prefectural cities, and uses regression models and spatial regime analyses to investigate factors influencing the inequality from 1990 to 2010. The spatial diffusion of FDI clusters from the eastern/coastal region to the interior shows the trend of FDI convergence among regions. However, increasing numbers of FDI clusters and hot spots show the increasing divergence among cities within three regions. Agglomeration effects have replaced institutional factors to become one of the most significant factors influencing the FDI inequality among cities. Additionally, special economic zones, coastal open cities, provincial capital cities, and development zones lost their advantages in FDI as more reforms set in. The spatial regime analyses further indicate the significance of market size in FDI in prefecture-level cities and the significance of agglomeration economies in FDI in capitals and municipalities.

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.

Too many to handle? Two types of multimarket contacts and entry decisions

Purpose– The purpose of this paper is to examine how firms with multimarket contacts in both product and geographic markets make foreign direct investments (FDI) location choices and to advance the understanding about how managers with cognitive limits cope with opportunities to take the advantage of mutual forbearance in two types of markets.Design/methodology/approach– Drawing upon the literatures on multimarket contact and decision making, the authors develop original hypotheses on how multimarket contacts in two types of markets influence firms’ choice of destination for foreign investments. The authors test the hypotheses using longitudinal archival data on foreign market entries of Japanese auto parts makers.Findings– The authors find that when choosing FDI locations, firms reduce the cognitive burdens of coping with multimarket contacts in the two types of markets by focussing exclusively on what is perceived as relevant to the decision at hand. The authors also find that this propensity is particularly significant for large firms, whereas small firms use different decision rules and avoid entering markets with the greater degree of multimarket contact with prior entrants, whether in product or national market.Practical implications– Although heuristics simplify competitive environments and reduce managers’ cognitive burdens, such a cost-saving orientation could increase the risk associated with international entry that may end in severe counterattacks from prior entrants, wasteful foreign investments, and substantial entry failures.Originality/value– This study contributes to the literature by adopting multimarket contact theory to foreign market entry, jointly analyzing two types of multimarket contacts, testing three alternative hypotheses about how boundedly rational managers cope with multimarket contacts in two markets, and demonstrating that managers focus on multimarket contacts only in one type of markets when making entry decisions.