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8/3/2019 FDI Location
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Multinational Performance and the Geography of FDI:
Evidence from 46 Countries
Yong Yang
University of Essex
Pedro MartinsQueen Mary University of London
Nigel Driffield
University of Aston
Dec, 2011
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 1 / 14
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Intro
Motivation
The study of multinationality and firm performance has increasingly gainedimportance in economic implication of globalization.
Does the increasing multinationality subsequently boosts performance -linear or curvilinear shapes?
Does location choice of FDI matter? Possible drivers:
Heterogeneous economies (developed and developing country locations)
Different returns (profitability, productivity) - Driffield and Yang (2011)
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 2 / 14
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Literature and Hypotheses
Literature - Multinationality, location and firm performance
The theoretical literature are firmly rooted in the seminal work of Buckley and
Casson (1976) and Dunning (1979, 1981, 1998), and are recently updated byBuckley and Casson (2009), Dunning and Lundan (2008), Hennart (2009) andVerbeke and Greidanus (2009).
Much of the empirical literature is based on Kogut (1985), Benvignati (1987),
Grant (1987).
A positive correlationA negative correlationThe U-shaped patternThe inverted U-shaped patternS pattern
Contractor et al, (2007) discuss in detail their interpretation of the "curvilinear
hypothesis".
Recent Survey/Meta paper: Li IJMR 2007, Yang and Driffield MIR 2011.
Few papers on the Location choice of FDI.
Exception: Pantzalis JIBS 2001, Berry SMJ 2006, Qian et al. JIBS 2008.Beuelsdijk et al JEG 2010
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 3 / 14
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Literature and Hypotheses
Hypotheses
Hypothesis 1: There is a positive relation between multinationality and firmperformance.
Hypothesis 2: the relationship between multinationality and performance isU shaped. The returns to internationalization only occur once the initial
costs of internationalization have been incurred. As such, the relationship isinitially negative, but increases after a given level of internationalisation.
Hypothesis 3: Multinational firms have a higher return to investing indeveloping countries than in developed countries, and the turning points inthe nonlinear relationship occurs earlier
Hypothesis 4: Developing country firms will gain through investing in otherdeveloping countries, though these gains occur at a slower rate than fordeveloped country firms.
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 4 / 14
Li d H h
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Literature and Hypotheses
This paper - contributions
A wider range of countries
46 countries, including developing countries
Scope for greater heterogeneity - less likely to find effects?!Focus on the heterogeneity between locations of developed and developingcountries
Several robustness tests
Extension: parent and subsidiary linkages
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 5 / 14
D t
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Data
Orbis
Detailed accounting and financial info from largest firms across the world.
Sourced from company reports by different providers.
Variables include: return on sales, expenditure on investment, employees, assets, firm age,
number of subsidiaries (including overseas subsidiaries), sales and capital, sector.
Info on subsidiaries of each company (25% or more shares control).Multinationality I: OSTS - the ratio of the number of overseas subsidiaries in
relation to all subsidiariesMultinationality II: OSTS D
ed - the ratio of the number of overseas subsidiaries indeveloped countries in relation to the firm’s total subsidiaries
Multinationality III: OSTS D
ing - the ratio of the number of subsidiaries indeveloping countries in relation to the firm’s total subsidiaries
Limited access: only subset of large firms
16,835 multinationals4,904 firms have more overseas subsidiaries in developing than developed countries.1996-2007 period. In most cases are 2005 and 2006.
Bhaumik, Driffield, Pal JIBS 2010, Mallick and Yang FMII 2011 use the Orbis. Budd,Konings, Slaughter REStats 2005 use European version of these data (Amadeus). SeeRibeiro et al. OECD 2010 for more information on the Orbis data.
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 6 / 14
Data
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Data
Scatterplot of numbers of overseas subsidiaries in developed and developing countries
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Data
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Data
Descriptive statistics
Multinational Firms Domestic FirmsVariable Mean Std. Dev. Obs Mean Std. Dev. Obs T testSales 1071.77 4202.84 16835 363.92 1306.43 22345 23.70Return on Sales 0.07 0.10 16835 0.05 0.11 22345 11.76Subsidiaries 21.31 53.58 16835 5.69 17.69 22345 40.73Overseas Subsidiaries 9.90 29.05 16835 0 0 22345 0
OSD
ed 7.03 22.65 16835 0 0 22345 0
OSD
ing 2.86 8.88 16835 0 0 22345 0OSTS 0.56 0.32 16835 0 0 22345 0
OSTSD
ed 0.38 0.34 16835 0 0 22345 0
OSTSD
ing 0.19 0.27 16835 0 0 22345 0Firm Age 37.04 34.89 16835 28.90 29.19 22345 25.12Employment 4676.67 23037.09 16835 1591.54 5745.33 22345 19.24
Firm Asset 1515.60 6040.92 16835 599.87 3172.23 22345 19.39Foreign Ownership 12.33 27.20 16835 8.74 26.30 22345 13.18Dev 0.96 0.19 16835 0.90 0.30 22345 22.43
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 8 / 14
Results
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Results
The empirical specification
Y it = β1OSTS it + λX it + γ t + e it , (1)
Y it = β2OSTS D
ed it + β3OSTS
D
ing it
+ λX it + γ t + e it , (2)
Y it = ϕ1OSTS it + ϕ2(OSTS it )2 + λX it + γ t + e it , (3)
and
Y it = ϕ3OSTS D
ed it + ϕ4(OSTS
D
ed it )2 + ϕ5OSTS
D
ing it
+ ϕ6(OSTS D
ing it
)2 + λX it + γ t + e it ,
(4)
Y it : the return on sales of firm i in year t
OSTS it = OSTS D
ed it +OSTS D
ing it .
X it : assets, firm age, ownership structure, different combinations of fixed effects,
including industries and countries and year effects (γ t ).
Robust standard errorsSignificance levels: *:0.10 **:0.05 ***:0.01
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 9 / 14
Results
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Results
OLS results
(1) (2) (3) (4)OSTS .0062∗∗ -.0145(.002) (.010)
OSTS 2 .0183∗∗
(.009)
OSTS D
ed .0027 .0033(.003) (.008)
(OSTS D
ed )2 -.0017
(.008)
OSTS D
ing .0132∗∗∗ -.0158∗
(.003) (.008)
(OSTS D
ing )2 .0339∗∗∗
(.009)
Employment -.0162∗∗∗ -.0161∗∗∗ -.0163∗∗∗ -.0161∗∗∗
(.001) (.001) (.001) (.001)
Total Assets .0243∗∗∗ .0243∗∗∗ .0244∗∗∗ .0245∗∗∗
(.001) (.001) (.001) (.001)Firm Age .0056∗∗∗ .0056∗∗∗ .0056∗∗∗ .0057∗∗∗
(.001) (.001) (.001) (.001)
Foreign .0019 .0019 .0018 .0017(.003) (.003) (.003) (.003)
Obs. 16835 16835 16835 16835
Adj − R 2 .200 .200 .201 .201
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 10 / 14
Results
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esults
The importance of home country effects
Developed Country MNEs Developing Country MNEs(1) (2) (3) (4) (5) (6) (7) (8)OSTS .0058** -.0151 -.0035 -.0519
(.003) (.010 ) (.015) (.061)
OSTS 2 .0185** .0434(.009) (.051)
OSTS D ed .0030 .0028 -.0246 .0232(.003) (.008) (.018) (.073)
(OSTS ed )2 -.0007 -.0588(.008) (.066)
OSTS D ing .0120*** -.0152* .0097 -.0748(.003) (.009) (.017) (.055)
(OSTS ing )2 .0321*** .0840*(.010) (.047)
Employment -.0164*** -.0165*** -.0163*** -.0163*** -.0107** -.0108** -.0105** -.0106*(.001) (.001) (.001) (.001) (.005) (.005) (.005) (.005)
Total Assets .0246*** .0247*** .0246*** .0248*** .0145*** .0153*** .0145*** .0149**(.001) (.001) (.001) (.001) (.005) (.005) (.005) (.005)
Firm Age .0056*** .0056*** .0056*** .0057*** .0054 .0059 .0057 .0060(.001) (.001) (.001) (.001) (.007) (.007) (.007) (.007)
Foreign .0013 .0012 .0013 .0012 .0366 .0360 .0374 .0370(.003) (.003) (.003) (.003) (.028) (.028) (.028) (.028)
Obs. 16176 16176 16176 16176 659 659 659 659
Adj − R 2 .195 .196 .196 .196 .286 .289 .286 .293
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 11 / 14
Robustness
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Robustness
Consistent results from three four sub-samples:
MNEs who have predominantly expanded into developed nations.MNEs who have predominantly expanded into developing nationsMNEs who have expanded only into developed nationsMNEs who have expanded only into developing countries
Consistent results from robustness tests:
consider an alternative set of multinationality measures: the number of foreign subsidiariesintroduce a variable which measures the average GDP per capita for
the nations in which each firm has overseas subsidiaries (EDV). Wefind the interaction between OSTS and EDV is negative.re-estimate the MP relationship, including firms which have at leastone domestic subsidiary
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 12 / 14
Robustness
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Extension: A subsample (6442 multinationals, 19070 overseas subsidiaries
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 13 / 14
Conclusions
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Conclusions
The results presented here extend MP literature by highlighting the distinction betweentypes of FDI location, and anticipated outcome. We interpret these results as indicatingthat the potential of globalisation, in particular in terms of increasing investments indeveloping countries, has not yet been met by multinational firms.
The most promising expansion strategies may involve setting up more subsidiaries indeveloping countries.
The returns to investing in developing countries then occur more quickly for westernMNEs investing in developing countries.
A good deal of learning is required for gains from internationalisation to be realised bydeveloping countries MNEs.
Our limitations:Cross-sectional nature of our data set.
Our estimates does not consider sample selection issue (Heckman Two Step), and also donot rule out some form reverse causality (IV estimation).
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