Exploring outward FDI and the choice of destination: evidence from Swedish firm-level data

ABSTRACT

Using Swedish firm-level data on all firms and their affiliates abroad, we investigate what observable firm and country characteristics affect the size of an affiliate in a particular destination. We employ the richness of the data to investigate the importance of destination country factors in explaining firm outward FDI activities and distinguish between the factors that affect such activities in manufacturing versus services firms as well as vertical versus horizontal investments. Our results lend support to existing theories of multinational activity of manufacturing but not services firms. We also find observable differences between vertical and horizontal manufacturing firms that are not always explained by theory.

KEYWORDS:

• Outward FDI
• globalization
• FDI destination
• heterogeneous firms

JEL CLASSIFICATION:

• F21
• F23

Acknowledgement

We thank conference participants at SNEE in Mölle, 2014, and ETSG in Paris, 2015.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ We also have information on the sales by the affiliates, but the percentage of missing observations or zero sales are much higher than that of employment. We therefore choose to focus on employment by the affiliate as a measure of investment size.

² Measured according to the method by Aw, Chung, and Roberts (2000).

³ Industry is defined as the 3-digit NACE industry.

⁴ Calculated as ; the closer to 1 the more similar the host country is to Sweden in terms of development level and the closer to 0 the more dissimilar it is.

⁵ GDPs and distances are taken from CEPII; rule of law index is from the World Governance Indicators of the World Bank; trade and investment climate measures are from the Heritage Foundation.

⁶ This information is provided by Statistics Sweden.

⁷ The classification of intermediate and final goods is made according to the Broad Economic Categories classification.