Commonalities and differences between production-related foreign direct investment and technology-related foreign direct investment in developed and emerging economies

Abstract

This paper investigates commonalities and differences in firm-level determinants of internationalization of production (production-related investments or PFDI) and innovation (technology-driven investments or TFDI) by multinational enterprises. Our database is based on a cross-country survey which includes firms within Automotive, Agro-processing, and Information and Communication Technology sectors from both developing and advanced economies. Our results show that despite some differences, most of the determinants affect in a similar manner both the PFDI and TFDI which rather contradicts recent arguments claiming significant differences between the two. More interestingly, however, we found that institutional determinants such as policies related to foreign direct investments play almost no role in internationalization process of firms while managerial (internal to the firm) determinants had a far greater impact.

Keywords:

• production-related foreign direct investment (PFDI)
• technology-related FDI (TFDI)
• multinational enterprises (MNEs)

Acknowledgements

We would like to thank Taehyun Jung, Gouya Harirchi, and Davide Castellani for their feedback on both theory and econometrics of this paper. We would also like to thank Joseph K. Joseph and two anonymous referees for their comments to an earlier version of this paper.

This paper is part of the project ‘The challenge of globalization: Technology-driven foreign direct investment (TFDI) and its implications for the negotiation of international (bi and multilateral) investment agreements’. We are thankful to Riksbanken for their financial support. The usual disclaimer applies.

Notes

1. In later versions of the OLI framework, ‘strategic asset seeking’ was added to account for investments motivated to augment already existing advantages of the firm (see Dunning, 2001). However, this notion is also overshadowed by the overemphasis on production-related activities and is seen rather as an inevitable by-product of offshoring production.

2. Understood as the geographical dispersion of production and innovation.

3. The questionnaire also provided an open-ended option to mention other factors affecting their offshoring decision. Only two firms used this option; they were deleted from the sample.

4. In an initial model, we tried to capture the linkages with specific actors such as clients or suppliers, but the model did not return any significant difference.

5. We tested whether using probit or mprobit instead makes any difference in the model. The predicted probabilities were highly and significantly correlated between the models, and no changes were seen except in variance of error, which was expected.