Industrial groupings and foreign direct investment

Abstract

We explore worldwide foreign direct investment (FDI) location decisions by Japanese manufacturing firms from 1985 through 1991. Our conditional logit estimates provide evidence that firms' location decisions are affected by membership in either vertical or horizontal keiretsu. Consistent with previous studies that stress agglomeration effects on firms' location decisions, we find that the stock of investment in a region by a firm's vertical keiretsu partners increases the probability of location. Further, we find that the recent flow of investment into a region by a firm's horizontal keiretsu partners increases the probability of investment to the region, providing evidence of networking effects. D

A Review of the Empirical Literature on FDI Determinants

“…Although this does not rule out that keiretsu financing has an important impact on the margin! Blonigen, Ellis and Fausten (2005) focuses on another possible effect of these horizontal keiretsu -exchange of information. Executives of the largest firms in a keiretsu often participate in "Presidential Council" meetings, where surveys find that information exchange is the primary activity.…”

“…Executives of the largest firms in a keiretsu often participate in "Presidential Council" meetings, where surveys find that information exchange is the primary activity. Blonigen, Ellis and Fausten (2005) hypothesizes that such exchanges may lower the costs of acquiring information on sites for future affiliates and lead to a positive effect of previous FDI by horizontal keiretsu firms on a firm's FDI location decision. Using a data on Japanese firm FDI locations across the world from 1985 through 1991, they find that recent FDI by fellow horizontal keiretsu firms of at least 100 employees increases the probability of a firm locating in that same region by 20%.…”

Systematic Literature Review of Determinants of FDI

“…It is widely accepted that the quality of institutions is an important country level determinant of FDI activity [10], particularly for developing countries [21]. In developed countries, effective property rights protection ensures that the owner of an asset 'has the discretion over the uses to which the asset is put and is able to appropriate returns from the asset'.…”

“…In developed countries, effective property rights protection ensures that the owner of an asset 'has the discretion over the uses to which the asset is put and is able to appropriate returns from the asset'. On the contrary, a weak legal protection of property rights, which is often perceived in transition economies, increases the chance of losing assets, and makes firms unlikely to undertake investment in the transition economy [21].…”

FDI technology spillovers, geography, and spatial diffusion

“…Such external economies are commonly known as Marshallian externalities of which the central idea highlights that the concentration of production in a particular location generates external benefits for firms in that location through knowledge spillovers, labor pooling, and close proximity of specialized suppliers (Marshall, 1920). 1 The foreign direct investment (FDI) location literature has documented similar self-perpetuating growth or agglomeration pattern of multinational corporations (MNCs) in space and over time (see, among others, Head et al, 1995;Cheng andKwan, 2000a, 2000b;Blonigen et al, 2005;Lin and Kwan, 2011). The externalities arising from FDI penetration also have long received great attentions from both economists and policy makers.…”