| Mode, Size, and Location of Foreign Direct Investment and Industry Price Mark-Up |
| | Chung, Wilbur C. | New York U. | wcchung@stern.nyu.edu | (212) 998-0419 |
| | Host industries benefit when inward foreign direct investment (FDI) raises competition and increases productivity. While supporting
FDI's positive influence, most studies typically use aggregate measures for FDI: the inward flow of dollars or the change in an
industry's foreign production share. Yet, a FDI flow is composed of many individual, heterogeneous firms. To further explain how
FDI effects the host, I introduce three heterogeneous traits of the foreign firms that compose the FDI flows. Using investment
transaction data, I construct industry-year averages of the foreign firms' entry mode, investment size, and location choice.
Consistent with prior research, I find that inward FDI raises competition for US manufacturing industries in 1987-1991; price mark-up,
the ratio of price over marginal cost falls. Further, I find that competition rises more when the FDI flow locates further away from
incumbent industry. While expecting that FDI located closer should raise competition more, this opposite finding is consistent with
endogenous location choice. Stronger entrants, whom incumbent industry responds to more strongly, might purposefully choose to
locate more distantly. |
| | Keywords: FDI; Location; Competition |
| Foreign Direct Investment by Japanese Multinationals: An Empirical Analysis of the Internalization Theory |
| | Berry, Heather K. | U. of California, Los Angeles | heather.berry@anderson.ucla.edu | (310)-825-7902 |
| | Sakakibara, Mariko | U. of California, Los Angeles | mariko.sakakibara@anderson.ucla.edu | (310)-825-7831 |
| | This paper analyzes the applicability of the internalization theory and the evolution of the value of a firm's multinationality to shareholders using a sample of 142 Japanese manufacturing firms over a twenty-one year period (1974-1994). Internalization theory predicts that foreign direct investment (FDI) will occur when a firm can increase its value by internalizing the market for its intangible assets. This prediction implies that the accumulation of a firm's intangible assets should precede investment abroad. Though other studies have reported a significant relationship between intangible assets and foreign investment using one-year cross-sectional data, this study uses firm-level data spanning two decades to analyze the relation between a firm's FDI and its accumulation of intangible assets. Using vector autoregressive analysis to test for Granger causality, we find that the accumulation of intangible assets Granger causes FDI. The evolution of the value to shareholders of a firm's multinationality (including both FDI and exports) as a firm's level of international activity changes is explored by analyzing firms' Tobin's Q ratios. Using panel data regression models, we find that exports are valued by shareholders in an early period of international expansion while FDI is valued by shareholders in a later period. Further, we find that the positive impact of technical know-how on a firm's value is enhanced by its FDI in an early period of international expansion. Finally, our results also hold for export-oriented industries which were affected by voluntary export restraint agreements. |
| | Keywords: Internalization Theory; Foreign Direct Investment; Tobin's Q |
| When do International Acquisitions Create Value for Bidding Firms?: An Event Study Test |
| | Kim, Yangmin | Texas A&M U., College Station | Ykim@cgsb.tamu.edu | (409)-845-2381 |
| | Based on internalization theory of MNE, agency theory, and risk reduction theory from finance, this paper examines how international acquisitions create value for acquiring firms. Several hypotheses about the influences of the bidding firm's corporate governance structure, intangible assets, and the presence of acquiring firm in the target company's country on the stock market's evaluation of international acquisition announcements are developed and tested. Variable such as relative acquisition size, bidder context that indicates whether there is other bidder for target company, the R&D intensity and the debt level of the bidding firm explain up to 27 percent of the variance in abnormal return of bidding firm upon acquisition announcement. The test results partially support both agency theory and internalization theory. |
| | Keywords: International Acquisition; Internalization; Corporate governance |
| Country of Origin Determintants of Foreign Direct Investment in an Emerging Market: The Case of Mexico |
| | Thomas, Douglas E. | Texas A&M U. | dthomas@tamu.edu | 405-845-0926 |
| | Foreign direct investment (FDI) research has generally focused on inward FDI to large developed nations. Very limited research has examined the country of origin factors that are related to FDI into the developing nations or emerging markets that are becoming increasingly important in the global economy. In this paper, we provide the first empirical test of a multi-variable model of factors related to FDI in an emerging market: Mexico. Economic, socio-political, and geographic factors are hypothesized to be important country of origin determinants of FDI into Mexico. The results indicate that some factors such as level of bilateral trade, GDP, geographic distance, and exchange rates are related to FDI into Mexico. At the same time, relationships between country of origin factors such as cultural distance and political risk and FDI that have previously held in research on FDI in large, developed nations do not hold in the same way in the emerging market context. Future research should work to further develop this model in the emerging market context. |
| | Keywords: International business; Foreign Direct investment; Mexico |