Estimating the Production Efficiency of US Foreign Direct Investment

This paper empirically estimates the efficiency of outward US foreign direct investment (FDI) within the framework of economies of scale, which is hypothesized as a main goal of ‘efficiency‐seeking’ multinationals. By using data for the period 1982–2007 and a nonhomogeneous production, the estimates of efficiency indicate an improvement in efficiency from decreasing to increasing returns to scale. The increasing productivity of both capital and labor is a contributory factor. Evidence of increasing elasticity of factor substitution attests to management use of a flexible production technology that enables efficient resource allocation. The results lend support to the ‘efficiency‐seeking’ hypothesis of FDI. Copyright © 2012 John Wiley & Sons, Ltd.