A Review of the Empirical Literature on FDI Determinants
Bruce A. Blonigen^
University of Oregon and NBER
Initial Draft: December 2004
This Draft: April 2005
Abstract: This paper surveys the recent burgeoning literature that empirically examines the foreign direct investment (FDI) decisions of multinational enterpris (MNEs) and the resulting aggregate location of FDI across the world. The contribution of the paper is to evaluate what we can say with relative confidence about FDI as a profession, given the evidence, and what we cannot have much confidence in at this point. Suggestions are made for future rearch directions.
Keywords: Foreign direct investment, multinational enterpris; literature review.
JEL Classification: F21; F23.清洁造句
^ This paper was written for an International Atlantic Economic Society ssion at the 2005 ASSA conference in Philadelphia, PA. I thank Ron Davies and Walid Hejazi for excellent comments and suggestions. All remaining errors are my own.
1.Introduction
It is well known that the growth of multinational enterpri (MNE) activity in the form of foreign direct investment (FDI) has grown at a faster rate than most other international transactions, particularly trade flows between countries. In many ways, MNEs are the control centers for a large portion of international transactions other than FDI. For example, almost half of trade flows are intrafirm; i.e., trade within an MNE.1
The real-world trends have led to substantial recent interest by the international economics literature to empirically investigate the fundamental factors that drive FDI behavior. This paper provides a critical review of this literature with a discussion of future rearch areas. The literature is large enough that a comprehensive review is not possible. Instead this paper highlights what the author considers the more important and novel papers in the empirical literature on the determinants of FDI. The topic of the effects of MNE activity on host and home countries will not be addresd, bu
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t could easily be the focus of its own literature survey. On a final note, this survey’s focus will be more recent papers, and the interested reader should refer to Caves (1996) for a broader discussion of earlier papers in the literature.
三爱三节内容To organize ideas, we first examine the literature that motivates and tests its analysis of FDI determinants from a partial equilibrium view of the MNE. After briefly discussing the internal firm-specific factors that motivate a firm to become an MNE in the first place, we then examine the external factors that are likely determinants of the location and magnitude of FDI by MNEs. The external factors range from exchange rates and taxes, to factors that are likely more endogenous with FDI activity, such as trade protection and trade flows. The latter “determinants” of FDI, such as trade flows, opens up the larger issue of the quite varying motivations for FDI which are ignored to a large degree by the partial equilibrium literatures on
the effects of exchange rates and taxes. Such questions are key in the literature reviewed in the cond half of the paper – the recent work to develop the theory and estimation of general equilibrium models of MNE behavior.
2. Firm Characteristics that Affect the MNE Decision
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The most fundamental question about FDI activity is why a firm would choo to rvice a foreign market through affiliate production, rather than other options such as exporting or licensing arrangements. The standard answer revolves around the prence of intangible asts specific to the firm, such as technologies, managerial skills, etc. Such asts are public goods within a firm to the extent that using such asts in one plant does not diminish u of the ast in other plants. This explains why firms with such asts are more likely to have multiple plants, ceteris paribus, but not necessarily why they would be multinational. To explain why such asts lead to an MNE decision, we often note the potential for market failure connected with the asts. A standard hypothesis is that it is difficult to fully appropriate rents from such asts through an arrangement with an external party. For example, a licene will not offer full value in negotiations over a contract if the intangible ast is not fully revealed, but the licensor will not want to reveal the ast fully until a contract is finalized. In such situations, the optimal decision may be for the firm to internalize the market transaction, which would mean establishing its own production affiliate in the market. Early conceptualization of this notion includes Oliver Williamson’s work on transactions costs, and the development of the ownership-location-internalization (OLI) paradigm (e.g., e Rugman, 1980, and Dunning, 2001). Recent work has applied more formal theory of the firm, such as hold-up issues and agency theory, to
1 For example, Census (2001) finds that 47% of the U.S.’s trade with other countries was intrafirm in 1999.
provide more formal frameworks for understanding market failures that lead to a firm becoming an MNE (e.g., e chapter 5 of Navaretti and Venables, 2004, for an overview).2
精华乳是什么Testing the hypothes is difficult becau the firm-specific factors leading to the FDI decision are inherently unobrvable. As a result, R&D intensity (the ratio of rearch and development expenditures to asts or sales) and advertising intensity have been primarily ud as proxies for the prence of intangible asts and then ud as explanatory variables in firm-level studies of whether firms are “multinational” or not. In fact, it has become standard to include such variables in any firm-level analysis of the FDI decision. My own experience and reading of the literature suggests that R&D intensity is almost invariably positively correlated with multinationality regardless of the data sample, while the evidence for advertising intensity is much more mixed. An alternative test is provided by Morck and Yeung (1992) which found that publicly-traded U.S. firms announcing foreign acquisitions experienced positive abnormal returns to their stock only if they had a significant level of R&D and advertising intensity.
毛毛虫竞速In the final analysis, however, it is not possible to suggest that the empirical analys irrefutably confirm the internalization hypothesis. Such measures as R&D and advertising intensity may be proxying for other forces that lead to FDI, rather than tho connected with the internalization hypothesis. In addition, there is evidence that firms that are “lacking” R&D intensity (or innovation) relative to their industry competitors are the ones more likely to engage in FDI. For example, Kogut and Chang (1991) and Blonigen (1997) provide evidence that Japane firms’ acquisition FDI in the US was motivated by accessing firm-specific asts, not necessarily due to internalization of their own firm-specific asts. The motivations may or may not be contradictory to internalization motivations for FDI.
2 Feenstra and Hanson (2004) provides an important empirical contribution to this mainly theoretical literature where they find that the choice of ownership by a multinational firm in a Chine factory is related to “thickness” of
In the rest of this literature review the focus is much more on the exogenous and policy factors that affect the magnitude of FDI that we obrve, not whether FDI will occur or not in the first place. Industry and country-level studies of partial equilibrium specifications either ignore such micro-level factors or assume they are controlled for though an average industry- or country-level fixed effect. T
一字网名he general equilibrium work on the other hand models it directly, but then ties it back to country-level features (primarily country endowments) to again generate a country-level average effect. For example, FDI is more likely to originate in countries abundant in capital and skilled-labor which are necessary for generating the firm-specific asts that create the need to internalize through FDI.
3. Partial Equilibrium Analysis of External Factors Affecting FDI Decisions and Location
A large body of literature examining determinants of FDI begins with a partial equilibrium firm-level framework bad in industrial organization and finance to motivate empirical analysis. The studies then typically examine how exogenous macroeconomic factors affect the firm’s FDI decision, with the primary focus on exchange rate movements, taxes, and to a more limited extent, tariffs. Earlier studies often then u industry-level (or even country-level) data to explore the hypothes, while more recent work has had firm- and plant-level data available to more appropriately match the firm-level theory.
3.1. Exchange Rate Effects
The effect of exchange rates on FDI has been examined both with respect to changes in the bilateral level of the exchange rate between countries and in the volatility of exchange rates.
the export market and the extent to which this affects the relationship-specificity between the multinational firm and the Chine factories.
Until Froot and Stein (1991), the common wisdom was that (expected) changes in the level of the exchange rate would not alter the decision by a firm to invest in a foreign country. In rough terms, while an appreciation of a firm’s home country’s currency would lower the cost of asts abroad, the (expected) nominal return goes down as well in the home currency, leaving the rate of return identical.3
Froot and Stein (1991) prents an imperfect capital markets story for why a currency appreciation may actually increa foreign investment by a firm. Imperfect capital markets mean that the internal cost of capital is lower than borrowing from external sources. Thus, an appreciation of the currency leads to incread firm wealth and provides the firm with greater low-cost funds to invest relative to the counterpart firms in the foreign country that experience the devaluation of their currency. Froot and Stein (1991) provides empirical evidence of incread inward FDI with currency depreciation through simple regressions using a small number of annual US aggregate FDI obrvations, which Stevens (1998) finds is quite fragile to specification. Klein and Rongren (1994), however, confirms that exchange rate depreciation increas US FDI using various samples of US FDI disaggregated b
y country source and type of FDI.
无证酒驾Blonigen (1997) provides another way in which changes in the exchange rate level may affect inward FDI for a host country. If FDI by a firm is motivated by acquisition of asts that are transferable within a firm across many markets without a currency transaction (e.g., firm-specific asts, such as technology, managerial skills, etc.), then an exchange rate appreciation of the foreign currency will lower the price of the ast in that foreign currency, but will not necessarily lower the nominal returns. In other words, a depreciation of a country’s currency may very well allow a “fire sale” of such transferable asts to foreign firms operating in global 3 McCulloch (1989, p. 188) provides a simple sketch of this argument.
