MNC's location choice and agglomeration: a comparison between US and European affiliates in China

Abstract

US and European multinational corporations encounter greater cultural barriers than Asian multinational corporations when investing in China, and the global economic recession further raises their location risks. Using data from the ‘2007 Fortune 500’ list, we conduct conditional logit estimations to test the main determinants of the choices made by 457 US and 537 European manufacturing affiliates located in China during the period 1995–2007, just prior to the economic crisis. Our main finding is that market size, production costs, agglomeration effects and geographical location impact significantly on both US and European firms' choices. Agglomeration is the preferred strategy of the sample firms. We also show that the host sector's technological intensity has a greater impact on US firms than on European ones.

Keywords:

• agglomeration
• China
• conditional logit model
• foreign direct investment
• location choices
• US and European multinational corporations

Notes

1. At the end of 2006, China's top four FDI source economies were Hong Kong, European Union, Japan, and the US. (statistics from China's Ministry of Commerce).

2. For detail information, please refer to Mayer and Mucchielli (1999, 161).

3. In management and business studies, HHI is usually applied to measure the market concentration ratio, the size of the firms in relation to the industry or the situation of competition among firms. The higher the HHI, the larger the market controlled by a few big firms. Here we employ HHI to calculate the level of geographical concentration of US and European firms in China.