Why Manufacture Offshore? An Empirical Analysis of Valuation Effects

In this study, announcements by U.S. firms of offshore joint venture manufacturing during the 1980s are used to provide more comprehensive evidence than past studies on the wealth effects of offshore joint ventures. Evidence shows that the target country's level of economic development and political stability, currency strength of the originating country (U.S. in this study) relative to that of the target country, U.S. firm's mode of entry, and the relative value of the U.S. firm's investment in the joint venture affect the wealth of U.S. firms which engage in offshore joint ventures. The target country's level of economic development, its political stability, and the currency strength of the originating country relative to the target country are shown to be the dominant economic factors. Of particular importance, evidence indicates that the target country's level of economic development is a more important determinant of excess returns than is its political stability.