The Role of Home and Host Country Characteristics in FDI: Firm-Level Evidence from Japan, Korea and Taiwan

Abstract

There is a large and growing empirical literature that investigates the determinants of outward foreign direct investment (FDI). This literature examines primarily the effect of host country characteristics on FDI even though home country characteristics also influence the decision of firms to invest abroad. In this paper, we examine the role of both host and home country characteristics in FDI. To do so, we constructed a firm-level database of outward FDI from Japan, Korea and Taiwan. Our empirical analysis yields two main findings. First, host countries with better environment for FDI, in terms of larger market size, smaller fixed entry costs and lower wages, attract more foreign investors. Second, firms from home countries with higher wages are more likely to invest abroad. An interesting and significant policy implication of our empirical evidence is that policy-makers seeking to promote FDI inflows should prioritize countries with higher wages.

Keywords:

• FDI
• multinational firm
• firm heterogeneity
• productivity

JEL CLASSIFICATION:

• F21
• F23
• D24

Acknowledgements

This paper was presented at Korea International Economic Association Annual Conference. We would like to thank the participants for their comments. We also would like to thank Kuo-I Chang, Kiyoyasu Tanaka and two anonymous referees for their invaluable comments. The financial support by a JSPS Grant-in-Aid for Young Scientists (B) is also acknowledged.

Notes

1. One example of studies using the firm-level FDI data in a multiple country setting is Navaretti et al. (2010), which shows how outward investments in cheap labour countries affect the home activities of French and Italian firms that turn multinational firms.

2. As in Yeaple (2009), we do not take into consideration any type of interaction among overseas plants. Such interaction has been closely examined in some studies, including Yeaple (2003), Grossman et al. (2006), Baltagi et al. (2007) and Ekholm et al. (2007).

3. More precisely, Yeaple (2009) introduces the host country's GDP and GDP per capita, geographical distance between countries and English-speaking dummy variable.

4. Due to the data limitation through our focus on multiple investing countries, we could not investigate other “investment performance” variables such as investment amount, sales and so on.

5. The 58 host countries are Argentina, Australia, Austria, Bangladesh, Belgium, Bolivia, Brazil, Canada, Chile, China, Costa Rica, Czech Republic, Denmark, Dominican Republic, El Salvador, France, Guatemala, Guyana, Honduras, Hong Kong, Hungary, India, Indonesia, Iran, Ireland, Israel, Italy, Jordan, Lao PDR, Luxembourg, Malaysia, Mauritius, Mexico, Mongolia, Netherlands, New Zealand, Nicaragua, Norway, Pakistan, Panama, Papua New Guinea, Philippines, Poland, Romania, Russian Federation, Saudi Arabia, Singapore, South Africa, Spain, Sri Lanka, Swaziland, Sweden, Switzerland, Thailand, Turkey, the UK, the USA and Vietnam.

6. See the website http://www.toyokeizai.net/shop/cdrom/kaigai_cd/detail/BI/0660130b1de80bc637ac64cba63ca12a/.

7. See the website http://www.gpcbooks.co.kr/newmall/shop/item.php?it_id=908140001.

8. See the website http://newmops.twse.com.tw.

9. Among investing countries, Taiwan joined the WTO in 2001. In our sample of host countries, China, Vietnam and Russia are non-WTO member countries (China became a member in 2001).

10. Yeaple (2009) introduces GDP per capita instead of wages.

11. In this paper, we do not take serious care of endogeneity issues. Indeed, our estimates may indicate the correlation relationship between home wages and FDI rather than their causal relationship. Thus, we may need to carefully interpret our estimation results.