The determinants of cross-border equity flows

We explore a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-1996. We show that a “gravity” model explains international transactions in financial assets at least as well as goods trade transactions. Gross transaction flows depend on market size in source and destination country as well as trading costs, in which both information and the transaction technology play a role. Distance proxies some information costs, and other variables explicitly represent information transmission, an information asymmetry between domestic and foreign investors, and the efficiency of transactions. The geography of information is the main determinant of the pattern of international transactions, while there is weak support in our data for the diversification motive, once we control for the informational friction. We broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings.     

Testing trade-off and pecking order theories financing SMEs

This paper explores two of the most important theories behind financial policy in Small- and Medium-Sized Enterprises (SMEs), namely, the pecking order and the trade-off theories. Panel data methodology is used to test empirical hypotheses on a sample of 3,569 Spanish SMEs over a 10-year period dating from 1995 to 2004. Results suggest that both theoretical models help to explain SME capital structure. However, despite finding clear evidence that SMEs follow a funding source hierarchy (pecking order model), our results reveal that greater trust is placed in SMEs that aim to reach target or optimum leverage (trade-off model). This remains true even when SMEs take a long time to reach this level, due to the high transaction costs they have to face. Non-debt tax shields (NDTS), growth opportunities and internal resources all seem to play an important role in determining SME capital structure. Both size and age are also found to be significant factors. Moreover, the empirical evidence obtained confirms that SMEs clearly behave differently to large firms where financing is concerned.

The reversibility of different types of capital flows to emerging markets

We investigate whether some types of capital flows are more likely to reverse than others during currency crises. Earlier statistical testing has yielded conflicting results on this issue. We argue that the problem with the earlier studies is that the degree of variability of capital flows during normal or inflow periods may give little clue to their behavior during crises and it is the latter that is most important for policy. Using data for 35 emerging economies for 1990 through 2003, we confirm that direct investment is the most stable category, but find that contrary to much popular analysis, private loans on average are as reversible as portfolio flows.     

A knowledge-and-physical-capital model of international trade flows, foreign direct investment, and multinational enterprises

This paper addresses two important issues at the nexus of the literatures on international trade, foreign direct investment (FDI), foreign affiliate sales (FAS), and multinational enterprises (MNEs). First, the introduction of a third internationally-mobile factor (physical capital) to the standard 2 × 2 × 2 “knowledge-capital” model of MNEs with skilled and unskilled labor allows us to resolve fairly readily the puzzle in the modern MNE literature that foreign affiliate sales among two identical economies completely displace their international trade. Intra-industry trade and intra-industry FDI (and FAS) can coexist for national and multinational firms (with identical productivities) in identical countries. Second, the introduction also of a third country to the model suggests a formal N-country theoretical rationale for estimating gravity equations of bilateral FDI flows and FAS, in a manner consistent with estimating gravity equations for bilateral trade flows.     

Safety risk and international investment decisions

We identify and demonstrate the merit of a novel institutional factor, safety risk, which likely affects multinational corporations’ (MNCs’) international investment decisions. Safety risk refers to the extent to which security and physical well-being are endangered due to normalized aggression and criminality in society. Despite concerns from executives and policymakers, safety risk has attracted little research attention. We validate a safety risk measure and evaluate the construct’s effect on MNCs’ investments. The findings indicate that countries’ safety risk deters MNCs from investing. Further, in post hoc analyses, firms’ prior experiences with safety risk and countries’ private security investments moderated this relationship.     

Cherries for sale: The incidence and timing of cross-border M&A

This paper develops a model of cross-border M&A activity that features firm-level productivity shocks and endogenous export activity. We show that foreign firms will be relatively more attracted to targets in the domestic country that had high productivity levels that induced them to invest in large export networks several years prior to acquisition, but subsequently experienced a negative productivity shock (i.e., cherries for sale). From the theory we derive a dynamic panel binary choice empirical model to predict cross-border M&A activity, and find strong evidence for our hypotheses connecting the evolution of firm-level productivity to the ultimate targets of cross-border acquisitions using French firm-level data.     

The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004

We construct estimates of external assets and liabilities for 145 countries for 1970-2004. We describe our estimation methods and key features of the data at the country and global level. We focus on trends in net and gross external positions, and the composition of international portfolios. We document the increasing importance of equity financing and the improvement in the external position for emerging markets, and the differing pace of financial integration between advanced and developing economies. We also show the existence of a global discrepancy between estimated foreign assets and liabilities, and identify the asset categories accounting for this discrepancy.     

Seeking greener pastures: a theoretical and empirical investigation into the changing trend of foreign direct investment flows in response to institutional and strategic factors

A generic theoretical model is proposed that provides a holistic conceptualization of the phenomenon of changing trend of FDI flows. Integrating both institutional and strategic factors, a rationale for such a change is provided, and the circumstances under which future shifts might take place are identified. A collection of criteria and incentives that various host governments and their agencies must provide to attract FDI are outlined. Several propositions that lead to empirically testable hypotheses are developed from this model. Statistical evidence is then provided of a shift in FDI flows, and the change in their determinants, by empirically analyzing investment by US multinational enterprises into Western Europe and Asia over the 20-year period, 1981–2000.     

The complex integration strategies of multinationals and cross country dependencies in the structure of foreign direct investment

The behavior of many multinational enterprises is not well described by existing models of foreign direct investment (FDI). Firms often follow strategies that involve vertical integration in some countries and horizontal integration in others, a strategy known as complex integration. This paper presents a three-country model that is used to analyze why firms might follow a strategy of complex integration. My analysis reveals that complex integration strategies create complementarities between potential host countries that have important implications for the structure of FDI. The analysis also shows that falling transport cost between countries may increase the importance of complex integration strategies.     

A general equilibrium analysis of foreign investment and intersectoral linkage

In this paper, we demonstrate that a foreign capital induced growth in a protected sector, which provides an industrial input for agricultural products, may increase welfare even after the entire foreign capital income is repatriated. Such a policy may lead to an increase in the volume of trade along with an increase in the size of the protected sector, quite contrary to the usual perception. The analysed structure also incorporates migration and unemployment.     

What drives capital flows? The case of cross-border M&A activity and financial deepening

What key roles do macroeconomic and financial variables play in the foreign direct investment (FDI) decision of firms? This question is addressed in this paper using a large panel data set of cross-border Merger & Acquisition (M&A) deals for the period 1990-1999. Various econometric specifications are built around the simple “gravity model” commonly used in the trade literature. Interestingly, financial variables and other institutional factors seem to play a significant role in M&A flows. In particular, the size of financial markets, as measured by the stock market capitalization to GDP ratio, has a strong positive association with domestic firms investing abroad. This result points to the importance of domestic financial conditions in stimulating international investment during the boom years of 1990s, and accords with the significant drop in cross-border M&As in recent years.     

The complementarity of human capital and language capital in foreign direct investment

Integrating the literature on language-MNEs (multinational enterprises) in international business and economic theory of human capital (HC), we establish an analytical framework to systematically examine how HC and language capital (LC) jointly determine foreign direct investment (FDI). We contend that the extent to which MNEs can leverage HC in a host country for FDI depends on LC. Based on an extensive bilateral dataset covering 3315 country pairs during 1995–2008, we reveal clear evidence on the moderating role played by LC in HC-FDI relationship and such evidence is robust to different measures used for different variables, the inclusion of more control variables and different samples.     

The determinants of foreign direct investment in China: The case of Taiwanese firms in the IT industry

This study illustrates the factors that affect a firm's intention to engage in foreign direct investment (FDI) in China, using Taiwanese firms in the Information Technology (IT) sector as an example. By building upon the literature, we investigate a firm's decision to engage in FDI by taking industry and firm factors into consideration. This study applies an event history technique to perform an empirical analysis, taking into account the conditional probability of the element of time. These factors are analyzed in a dynamic context using a sample of 667 Taiwanese firms in 10 industries between 1996 and 2005. We find that network linkages, the expansion of markets, and China's incentive policies positively affect the intention to engage in FDI. A firm with a higher degree of export orientation and larger firm size also has a strong effect on motivating FDI.     

Why a poor governance environment does not deter foreign direct investment: The case of China and its implications for investment protection

It is widely believed that countries with a poor governance environment (e.g., weak laws and rampant corruption) do not attract foreign direct investment (FDI); however, our study suggests otherwise. Using China as a case study, this article argues that the prevailing theory that a good governance environment begets FDI is incomplete. When faced with a poor governance environment, investors choose direct investment over indirect (portfolio) investment because the former can be better protected by private means. In fact, China attracts a large amount of FDI because of, rather than despite, its lack of a good governance environment. In conclusion, this article offers strategies to better protect investments and to chart through the pitfalls resulting from rapid changes in the governance environment.     

Foreign vs domestic ownership on debt reduction: An investigation of acquisition targets in Italy and Spain

This paper examines the role of foreign versus domestic ownership in reducing the debt levels of acquired firms in Italy and Spain over the period 2002–2010. Acknowledging that lower debt levels can mitigate the risk of failure and thus enhance the chances for a positive post-acquisition performance and survival, we particularly examine the causal effect of foreign and domestic acquisitions on two firm-level debt measures: gearing and short-term leverage. To estimate causal relationships, we control for selection bias by applying propensity score matching techniques. Our results indicate that foreign acquisition leads to a significant and steady reduction in the debt ratios of the target companies. In contrast, the relationship between domestic acquisition and debt reduction appears to be smaller and statistically less robust.     

The impact of foreign direct investment on new firm survival in the UK: evidence for static versus dynamic industries

The paper examines the impact of Foreign Direct Investment (FDI) on the survival of business start-ups. FDI has potential for both negative displacement/competition effects as well as positive knowledge spillover and linkage effects on new ventures. We find a net positive effect for the whole dataset. However, a major contribution of the paper is to outline and test an argument that this effect is likely to be comprised of a net negative effect in dynamic industries (high churn: firm entry plus exit relative to the stock of firms) alongside a net positive effect in static (low churn) industries. We find evidence to support this view. The results identify new effects of globalisation on enterprise development with associated challenges for industrial policy.

Longitude matters: Time zones and the location of foreign direct investment

Using bilateral foreign direct investment (FDI) data, we find that differences in time zones have a negative and significant effect on the location of FDI. We show that this finding is robust across different specifications, estimation methods and proxies for time zone differences. Time zones also have a negative effect on trade, but this effect is smaller than that on FDI. Finally, the impact of the time zone effect has increased over time, suggesting that it is not likely to vanish with the introduction of new information technologies.     

The effects of competition policy,regulatory quality and trust on inward FDI in host countries

This article develops a comparative institutionalist framework to investigate how pro-enforcement reforms leading to a change in competition policy regimes attracts FDI in host countries, and how this relationship is moderated by the interplay between key formal and informal institutions. We revisit the FDI theory by integrating insights from economics of competition policy and the most recent debate on how institutions matter to international business. We contend that the effectiveness of competition policy enforcement is a crucial factor in attracting FDI, but only in host countries characterized by institutional configurations where the lack of trust is concomitant with a high-quality regulatory institutional environment. Our analysis on a sample of 63 countries followed in the 1980–2017 period supports our hypotheses. This paper contributes to a deeper understanding on the competition policy–FDI relationship at national level and has implications for policy makers.     

The spatial redistribution of Japanese direct investment in the United Kingdom between 1991 and 2010

Japanese firms have a firmly established reputation as influential foreign investors, originating from the surge of foreign direct investment into North America and Europe during the 1980s. This paper examines trends in Japanese corporate behaviour in the United Kingdom, a key investment destination for Japanese firms, over the period 1991 to 2010. Our ‘demographic’ analysis of Japanese firms' investments includes both investment and exit strategies. It is found that Japanese firms have reconfigured their UK presence in response to a rapidly changing market environment, with an enduring proclivity to cluster, notwithstanding government incentives intended to channel investment towards specific regions of the country.     

Cross-border mergers and acquisitions vs. greenfield foreign direct investment: The role of firm heterogeneity

We develop a general equilibrium model with heterogeneous firms to address two sets of questions: (1) what are the characteristics of firms that choose the various modes of foreign market access (exporting, greenfield FDI, and cross-border M&A), and (2) how does the international organization of production vary across industries and country-pairs? We show that the answers to these questions depend on the nature of firm heterogeneity. Depending on whether firms differ in their mobile or immobile capabilities, cross-border mergers involve the most or the least efficient active firms. The comparative statics on industry and country characteristics display a similar dichotomy.