The Trade‐Off between Foreign Direct Investments and Exports: The Role of Multiple Dimensions of Distance

To serve foreign markets, firms can either export or set up a local subsidiary through horizontal foreign direct investment (FDI). The conventional proximity–concentration theory suggests that FDI substitutes for trade if distance between countries is large, while exports become more important if scale economies in production are large. This paper investigates empirically the effect of different dimensions of distance on the choice between exports and FDI. We find that different dimensions of distance affect exports and FDI differently. There is clear evidence of a proximity–concentration trade‐off in geographical terms: the share of FDI sales in total foreign sales increases with geographical distance. The positive relation between import tariffs and FDI intensity provides further evidence for a trade‐off resulting from trade costs. On the other hand, the share of FDI decreases with language differences and cultural and institutional barriers. The latter dimensions of distance thus affect FDI more strongly than exports.     

A model of demand,productivity and foreign location decision among Taiwanese firms

We develop a theoretical framework to examine the relative importance of firm demand and productivity in firm decisions to export and where to locate foreign direct investments. The model shows that the equilibrium firm decision depends on product technology, consumer preference for product quality, fixed investment costs of establishing a foreign subsidiary, transportation costs and relative wages. Our empirical results confirm the predictions of the theoretical model. Firm-level demand and productivity components are important in explaining the decision to participate in foreign markets with their relative importance depending on the firm's organizational form (exports versus FDI) and the destination of the investments. In general, FDI firms are more productive than exporting firms regardless of FDI destinations. FDI firms also have a higher demand component than exporters and this demand component is stronger than productivity. Finally, among FDI firms, while those with a high demand index and productivity have a significantly higher propensity to invest in high-income countries, firm productivity is the sole determinant of firms undertaking FDI in low-income countries.     

Environmental Policy,North-South Trade and FDI

We analyze trade between two countries, called the North and the South. There is one firm in each country and production costs are lower in the South. To serve foreign markets firms may export or engage in FDI. Both countries set tariffs on imported goods. We find that the implementation of an environmental policy by the South may affect the location decision of the Southern firm. When only the North sets an environmental tax, firms engage in FDI if the difference in costs between the two countries is low, otherwise the South exports and the Northern firm engages in FDI. If the South also sets an environmental tax, this does not restrict FDI by Northern firm, encourages FDI by the domestic firm, reduces its environmental damage and increases joint welfare. Finally, in equilibrium the South decides to implement an environmental policy and both firms engage in FDI.     

New exports matter: Discoveries,foreign direct investment and growth,an empirical assessment for Middle East and North African countries

Export diversification has become a priority goal for the development of the Middle East and North African (MENA) countries. In this article, we aim at measuring both the effects of exports' diversification on growth in MENA countries and the way new exports and foreign direct investment (FDI) interact with each others in the process of growth. Although the effects of FDI on growth have been scrutinized by numerous studies up to now, the effects of diversification and discoveries in export have only very recently been assessed. But no one has made explicit the way FDI and export discoveries interact in the growth process. A model is estimated by the system-generalized method of moments and we provide robust evidence that export discovery and FDI stimulate gross domestic product (GDP) growth in our sample of countries, and that FDI does not necessarily have the same effect on growth according to the level of discovery of the country. We also show that the joint positive effect of new exports and of imports suggest that technological spillover from import but also from the integration to global value chains are likely to occur in our sample of countries.     

Outward FDI and Productivity: Micro‐evidence from Slovenia

This paper uses a rich data set of Slovenian manufacturing firms active in the period 1994–2002 that contains information on outward FDI and exports to different markets in order to test three empirical hypotheses that relate the decision for outward FDI to total factor productivity. First, the evidence supports the hypothesis proposed by Helpman, Melitz and Yeaple (2004) that more productive firms are more likely to invest in a foreign affiliate. Second, the hypothesis proposed by Head and Ries (2003 ) that less productive firms may be encouraged to invest in low‐income countries is rejected by the data. However, the main contribution of the paper is to confirm the third hypothesis that required firm's productivity increases with the number of markets that the firm serves, i.e. there is a positive relationship between the number of a firm's foreign affiliates and its total factor productivity.     

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.     

The role of corporate governance in FDI decisions: Evidence from Taiwan

There has been a considerable literature on the determinants of why firms undertake foreign direct investment (FDI), but very little on whether firms with different governance characteristics are more or less likely to venture overseas. For example, are family-controlled firms more predisposed to FDI than firms, with similar attributes, but different forms of ownership? Does the presence of institutional shareholders suggest a greater propensity to invest abroad? Does the composition of the Board of Directors have an impact? Most extant studies of corporate governance focus on the impact of governance factors on firm performance. However, these performance outcomes are a function of the strategic decisions made by the firms, which suggests it might be useful to consider the relationship between corporate governance factors and particular strategic decisions. One example is the decision to undertake foreign direct investment. The two main strands of IB literature on the determinants of FDI have little or nothing to say about how corporate governance factors might affect the FDI decision. Both internalisation theory and the resource-based view see FDI primarily as a means by which firms can appropriate rents in overseas markets from the exploitation of their idiosyncratic resources and capabilities. This paper extends this literature by investigating the effects of governance factors on the decision to undertake FDI. In particular, we want to assess the impact upon the FDI decision of (a) the extent of family control, (b) the presence of domestic and foreign institutional shareholders, and (c) the composition of the Board of Directors. We investigate these effects using a sample of 228 publicly listed firms in Taiwan, and our results clearly indicate that family control and share ownership by domestic financial institutions in Taiwanese firms are associated with the decision to undertake FDI. We also find that corporate governance impacts in different ways with regard to Taiwanese FDI in China in comparison to Taiwanese FDI in the rest of the world.     

Deregulation in Services and the Marketing Challenge

This paper contributes to the literature on international firm activities by providing the first evidence on the link between productivity and both exports and foreign direct investment (FDI) in services firms from a highly developed country. It uses unique new data from Germany, one of the leading actors in the world market for services. Statistical tests and regression analyses indicate that the productivity pecking order found in numerous studies using data for firms from manufacturing industries – where the firms with the highest productivity engage in FDI while the least productive firms serve the home market only and the productivity of exporting firms is in between – does not exist among firms from services industries. There is evidence that firms with FDI are less productive than firms that export; this finding is in line with recent empirical results reported for software firms from India.     

Foreign Direct Investment,Exports and Imports in Mexico

This paper analyses the liberalisation of foreign direct investment (FDI) in Mexico since the late 1980s, and its relationships with exports and imports. Such a process has eased the access of multinational corporations (MNCs) to the country, which has promoted exports. However, it has also resulted in a higher import content and the displacement of local firms, which has limited Mexico's economic development through the balance of payments constraint. The analysis is supported by the existence of linkages – bidirectional Granger causality – between exports, imports and FDI.     

FDI,market signal and financing constraints of firms in China

On the basis of an augmented Euler equation, we use firm survey data provided by the World Bank to investigate the impact of FDI (foreign direct investment) on the financing constraints of firms in China. First we calculate the forward and backward linkages of FDI. Then through empirical estimation, we find that only private firms have financing constraints and that the incoming FDI alleviates this situation. Private firms with more foreign capital shares or having stronger vertical linkage with FDI can get financial resources easily. Furthermore, industries hosting a large amount of FDI are favorite clients of the financial institutions because they are usually much more competitive in the world. As a result, the private firms in these industries also have easier access to financial resources. In the financial market, FDI is a helping hand that reduces the information asymmetry between firms and financial institutions. Financial resources go where FDI goes, which to some extent improves the allocation efficiency.     

Causality nexus of exports,FDI and economic growth of the ASEAN5 economies: evidence from panel data analysis

This paper analyzes the causal relationships between exports, FDI and economic growth among the ASEAN5 countries. We have used a three-stage procedure based on unit root, co-integration and causality tests applied to the panel data from 1981 to 2013. The results reveal that there is a bi-directional causal relationship between FDI and growth in the long run, while there is a unidirectional causal relationship from FDI to exports in the short run. Our results also confirm that the export-led growth (ELG) and FDI-led growth hypotheses hold true in the long and short run. To reinforce the FDI inflows, authorities should continue the progressive reduction of barriers, and increase the sophistication of quality exports to compete in the global market. This paper is the first of its kind to analyze the role of both FDI and exports in the ASEAN5 economies using panel analysis.     

Firm heterogeneity and technology transfers to local suppliers: Disentangling the effects of foreign ownership,technology gap and absorptive capacity

In this paper, I present novel microeconomic evidence on the effects of firm heterogeneity on the creation and impact of technology transfers from foreign direct investment (FDI) to local suppliers in a developing country setting. The main findings are threefold. First, FDI firms are significantly more involved in knowledge transfer activities than domestic producer firms. In particular, FDI firms offer more technological support, support with a direct positive impact on production processes of local suppliers. Second, the type of ownership also influences the effect of the technology gap on technology transfers. A large technology gap between a producer firm and its suppliers lowers the provision of support; however, FDI firms offer more technological support to their suppliers of material inputs when the technology gap is large. Independent of the support that the suppliers receive, foreign ownership of client firms and a large technology gap make it more likely that suppliers experience large positive impacts. Third, the level of absorptive capacity of local suppliers is also important for the impact of the technology transfers, confirming the notion that heterogeneity among both producer firms and local suppliers affect the level, nature and impact of local technology transfers.     

Foreign Market Entry Under Incomplete Contracts

This paper shows that incomplete contracts serve as a determinant of the mode of foreign market entry – that is exports versus foreign direct investment (FDI). When contracts between two agents within a firm are too costly to be written, the share of multinational firms may be higher or lower compared with a world without contractual frictions. The direction of change depends on the technologically required relative contribution of headquarter services in the joint production process. For example, in industries that use more inputs from the management unit as compared to inputs from a component supplier, the share of firms engaging in foreign direct investment is higher than under complete contracts. This effect may be so strong that the share of multinational firms increases in trade freeness.     

Foreign firm characteristics,labour market restrictions and FDI spillovers: Evidence from Moldova

This paper investigates how productivity spillovers from foreign to domestic firms are affected by foreign firm characteristics and labour market conditions in Moldova. We use firm-level administrative panel data and annual survey region-sector indicators of labour market conditions in 2005–2014. Baseline regressions show that domestic firms benefit from backward FDI spillovers, while we find no evidence of horizontal or forward spillovers. Spillover effects are heterogeneous and depend on the ownership structure and age of foreign firms. Domestic firms in upstream sectors benefit from both wholly foreign-owned companies (WFOC) and joint ventures (JV). However, JVs need less time in the market for positive spillovers to materialise, while WFOCs only lead to larger spillover effects when they are older. In regions and sectors where firms experience fewer labour market restrictions, backward FDI spillovers are larger. Interacting foreign firm characteristics with labour market restrictions, we find that spillovers through the labour market channel materialise only for older FDI, regardless of ownership type. The results are in line with our expectation that WFOCs need more time than JVs to develop linkages with local suppliers and lead to spillovers through this channel. Moreover, in developing countries labour market restrictions reduce labour mobility and consequently, the size of FDI spillovers across industries.     

FDI versus Exports: Multiple Host Countries and Empirical Evidence

There are two main options for companies to serve foreign markets: exports and foreign direct investment (FDI). Based on the Helpman et al. (2004) model for multiple host countries, this paper derives a clear theoretical prediction for the decision between both strategies. A bivariate probit model is estimated using a large data set of European companies to analyse the probability of using one or the other strategy. The empirical evidence indicates that more productive firms less (more) probably use the export (FDI) strategy to serve foreign markets. Moreover, a considerable number of companies use a combination of both the strategies to serve foreign markets, which is in line with a multiple‐country model.     

Exports,firm size,and firm dynamics

This paper explores the relationships between exports, firm size, and firm dynamics. It is based on a unique longitudinal data set collected at the establishment level, covering some 7000 manufacturing German firms. We present stylized facts on exports and firm size, showing that the probability that a firm is an exporter increases with firm size; however, there are many successful exporters among small firms, and non-exporters among larger firms, too, while most of the exports are from the top size groups of firms. An econometric study shows a picture that is consistent with theoretical considerations: The impact of firm size on exports is positive but decreasing, while human capital intensity, domestic market share, and advanced technology all have a positive influence on the export performance of a firm. Firm growth and export performance are positively related, as is expected from a model of a price-discriminating monopolist.     

Outward foreign investment and export structure: a case study of Taiwan's FDI in Malaysia

As Taiwan's outward FDI was primarily motivated by the relatively lower costs of land and labour in the host countries, one tends to expect that the structure of production and exports in Taiwan would shift toward higher capital and skill intensity. The structure of Taiwan's exports to the ASEAN-4 was concentrated more in higher human and physical capital intensities than Taiwan's total exports to the world. Moreover, Taiwan's exports to the ASEAN-4 were more concentrated on intermediate goods and machinery. A case study of Taiwan's outward FDI in Malaysia indicated that three of the five leading industries that accounted for a large shares of changes on FDI stocks and corresponding export commodities were the same. Pooling estimates also show that FDI has a small but positive impact on Taiwan's exports to the host country. The study further showed that Taiwan's FDI in Malaysia includes mixed tactics of ‘defensive’ and ‘aggressive’ strategies in various industries. In terms of the influence of the presence and economic role of ethnic Chinese on Taiwan's outward FDI, the study showed that the ‘Chinese connection’ has not been a significant factor in determining the industrial distribution of Taiwan's FDI in Malaysia.     

Risk and the technology content of FDI: A dynamic model

This paper incorporates risk into the FDI decisions of firms. The risk of FDI failure increases with the gap between the South's technology frontier and the technology complexity of a firm's product. This leads to a double-crossing sorting pattern of FDI—firms of intermediate technology levels are more likely than others to undertake FDI. It is with the attempt to relax the upper bound of the technology content of FDI, we argue, that many FDI policies are created. The theory's predictions are consistent with the empirical patterns of FDI in China by US and Taiwanese manufacturing firms.     

Corporate ownership and the theory of the multinational enterprise

This paper makes a contribution to the theory of the multinational enterprise (MNE) and, in particular, to why firms undertake foreign direct investment (FDI) rather than alternative strategies. We argue that FDI and its strategic alternatives involve different patterns of costs and returns over time, and hence different levels of risk and uncertainty. Traditional theories of the MNE conceptualize the firm as a risk-neutral decision-making entity with short-term efficiency objectives, and hence do not take these issues into account. This may be reasonable for firms with passive professional managers and widely-dispersed shareholders, operating in countries with the Anglo-American system of corporate governance. But many firms operate under quite different systems of corporate governance where concentrated shareholdings are commonplace and markets for corporate control are weak or non-existent. In these cases, shareholders exert considerable influence on all aspects of firm strategy including FDI. Furthermore, different groups of shareholders (State, family, institutions) are likely to have different objectives, different attitudes towards risk, and different decision-making time horizons. We thus suggest that the traditional theories of the MNE need to be extended to embrace consideration of corporate ownership (and other governance dimensions).