Multinational Performance and the Geography of FDI: Evidence from 46 CountriesYong Yang University of Essex Pedro Martins Queen Mary University of London Nigel Driffield University of Aston Dec, 2011 Y.Y ang & P.Mart ins & N.Driffield (2011 ) Geography of FDI Essex Dec 2011 1 / 14
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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
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),
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
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
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
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).
Y.Yang & P.Martins & N.Driffield (2011) Geography of FDI Essex Dec 2011 14 / 14