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Empirical Literature on Location Choice of Multinationals

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Complexity and Geographical Economics

Part of the book series: Dynamic Modeling and Econometrics in Economics and Finance ((DMEF,volume 19))

Abstract

The location choices of multinational enterprises have been the center of attention both empirically and theoretically in international and regional economics during the last 20 years. Different approaches and methods have been employed to examine foreign firms’ location decisions. We make a critical assessment of these approaches and their contributions to our understanding of dispersion of multinational activities across space. We start from the most influential theoretical contributions which have addressed the motivation of MNEs to be engaged in a horizontal or a vertical FDI and provide a list of the large number of foreign firms’ location determinants considered in the literature. Then, we discuss the various econometric specifications used in the empirical literature to test the hypotheses on these determinants. Finally, we discuss issues for further development specifically for modeling multinationals’ economic activity in space.

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Notes

  1. 1.

    Some empirical research on the determinants of location choice follows the survey method. In this case, firms are required to identify the determinants of its actual location (stated preferences). The survey method allows us to obtain very rich data and to understand the ranking among alternatives, being extremely relevant when historical information is unavailable. However, the stated preferences about location may differ from the real ones, while the results are highly responsive to sample characteristics.

  2. 2.

    See also Dunning (1981, 1986, 1988, 2000), Dunning and Narula (1996), and Dunning et al. (1996).

  3. 3.

    The ideas combined in the knowledge-capital model are developed in several previous works (see, i.a., Helpman 1984, 1985; Horstmann and Markusen 1987, 1992; Ethier and Markusen 1996; Markusen and Venables 1998).

  4. 4.

    Recently, a large number of studies have been carried out by means of count data models (Coughlin and Segev 2000; Guimaraes et al. 2003, 2004; Figueiredo et al. 2002; Basile 2004; Basile et al. 2006; De Propris et al. 2005).

  5. 5.

    This model is based on Newton’s law of universal gravitation where the force of gravitational attraction depends directly on the masses of the objects and inversely on the distance between their centers. The formula is \(F = GmM/d^{2}\), where F denotes the gravitational force, m and M are the masses and d is the distance between the masses. G is named as the gravitational constant.

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Acknowledgements

We are grateful to a referee that with his comments helped us to reformulate the analysis. We are responsible for any remaining errors.

Author information

Authors and Affiliations

  1. Department of Economics, Second University of Naples, Corso Gran Priorato di Malta, 81043, Capua, (CE), Italy

    Roberto Basile

  2. Department of Management Engineering, Istanbul Technical University, Suleyman Seba Cad. No. 90, Macka, Istanbul, 34367, Turkey

    Saime Kayam

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  1. Roberto Basile
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  2. Saime Kayam
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Correspondence to Saime Kayam .

Editor information

Editors and Affiliations

  1. Department of Law, University of Naples "Federico II", Naples, Italy

    Pasquale Commendatore

  2. Department of Management Engineering, Istanbul Technical University, Macka, Istanbul, Turkey

    Saime Kayam

  3. Department of Economics, WU Vienna University of Economics and Business, Vienna, Austria

    Ingrid Kubin

Appendix: A Sample of Studies on MNEs’ Location Choice

Appendix: A Sample of Studies on MNEs’ Location Choice

Study

Method

Countries

Findings

Altomonte (2002)

PM

CEE countries

Market potential and accessibility

Andreff (2002)

OLM

176 countries

Level of development and industry distribution in the home country

Becker et al. (2005)

CLM

German and Swedish MNEs

Market size, labor skill, labor cost, trade and investing cots

Baltagi et al. (2007)

SE

US outward FDI

Third country effects, complex FDI

Barrios et al. (2006)

NL

Ireland

Agglomeration economies, regional policy, technology level

Basile (2004)

NB, ZIP

Italian provinces

Location determinants differ according to entry mode (greenfield vs. acquisitions); Infrastructures

Basile et al. (2006)

NB

8 EU countries

Country border effects, institutions

Basile et al. (2008)

MXL

8 EU countries

Structural and cohesion funds

Bevan and Estrin (2004)

GM

12 transition economies

Unit labor costs, market size and proximity, privatization, banking sector, liberalization and institutions

Blonigen et al. (2007)

SE

US outward FDI in OECD countries

Third country effects

Brenton et al. (1999)

GM

5 EU Eastern countries

Stocks of FDI in transition countries diverge little from the expected pattern

Brush et al. (1999)

MLM

73 US, European and Japanese MNEs

National and regional characteristics

Buch et al. (2003b)

GM

Outward FDI of 7 countries

No evidence of redirection. GDP, GDP per capita, legal system, language, distance and restrictions in the recipient country

Buckley et al. (2007)

Panel

Chinese outward FDI

Market size, natural resources

Carstensen and Toubal (2004)

Dynamic panel

CEEC

Market potential, unit labor costs, labor skills, endowments, country risk, privatization

Cheng and Stough (2006)

CLM

Japanese FDI in China

Market size, labor, land, energy cost, infrastructure, incentives, agglomeration

Cieślik and Ryan (2004)

GM

Japanese FDI in Europe

Economic potential

Coughlin and Segev (2000)

SE

China

Agglomeration economies, market size, labor supply characteristics, infrastructure

Coughlin et al. (1991)

CLM

USA

Per capita incomes, density of manufacturing activity, taxes, wages, unemployment, unionization, infrastructure, investment promotion

Crozet et al. (2004)

CLM, NL

France

Market potential

De Beule and Duanmu (2012)

CLM

Chinese and Indian acquisitions

Indian firms utilize ownership advantages. Chinese FDI is more technology-seeking

De Propris et al. (2005)

NB

Italian provinces

Agglomeration economies

Devereux and Griffith (1998)

MLM

US MNEs in Europe

Profit taxes, agglomeration economies

Disdier and Mayer (2004)

CLM, NL

French MNEs in Europe

Agglomeration economies, institutional quality

Figueiredo et al. (2002)

CLM

Outward Portuguese FDI

Agglomeration economies

Friedman et al. (1992)

CLM

Japanese and European MNEs

Access to markets, labor market conditions, state and local taxes

Garretsen and Peeters (2009)

SE

Dutch FDI in 18 countries

Third-country effects

Head and Mayer (2004)

CLM, NL

Japanese firms in Europe

Market potential

Head et al. (1995)

CLM

Japanese FDI in USA

Industry-level agglomeration

Iammarino and Pitelis (2000)

MLM

Greek FDI in Bulgaria and Romania

Labor and trade costs, proximity to EU market, investment incentives, pace of transition, technology level

Kang and Lee (2007)

CLM

South Korean FDI in China

Market size and institutions

Kim and Rang (1997)

GM

Japanese and South Korean FDI

Exports and FDI substitutability vs. complementarity; market vs. cost orientation

Kolstad and Wiig (2012)

Panel

Chinese outward FDI

Natural resources, institutions

Lankes and Venables (1996)

MLM

Western FDI in transition countries

Progress on structural reforms

Ledyaeva (2009)

SE

FDI in Russia

Market potential

Loungani et al. (2002)

MLM

Greek firms

Borrowing capacity, labor intensity, sales growth rate, firm size, familiarity with foreign markets

Razin et al. (2003)

GM

45 countries

GDP per capita, education distance, trade, setup costs, marginal productivity

Zhang and Daly (2011)

Panel

Chinese outward FDI

Market size, natural resources, trade, growth and openness

  1. Notes: CLM conditional logit model, GM gravity model, MLM multinomial logit model, MXL mixed logit model, NB negative binomial model, NL nested logit model, OLM ordered logit model, PM probit model, SE spatial econometrics, ZIP zero-inflated Poisson model

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Basile, R., Kayam, S. (2015). Empirical Literature on Location Choice of Multinationals. In: Commendatore, P., Kayam, S., Kubin, I. (eds) Complexity and Geographical Economics. Dynamic Modeling and Econometrics in Economics and Finance, vol 19. Springer, Cham. https://doi.org/10.1007/978-3-319-12805-4_13

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