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Direct Investment, Research Intensity, and Profitability

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  • Severn, Alan K.
  • Laurence, Martin M.

Abstract

The large amount of foreign direct investment by U. S. firms in recent years suggests that such firms had a high internal rate of return on investment abroad. In this paper we attempt to explain this high rate of return. We conclude that direct investors tend to be in research-intensive industries and that their profitability is associated with research and development, rather than with direct investment itself. By investing abroad, or exporting, they increase the expected return to research activity. Thus, the internal rate of return on foreign direct investment exceeds average rates of return observed in foreign economies. Since direct investors in manufacturing are typically research-intensive, this result suggests why capital may flow from countries with high rates of return to those with lower observed rates of return.

Suggested Citation

  • Severn, Alan K. & Laurence, Martin M., 1974. "Direct Investment, Research Intensity, and Profitability," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(2), pages 181-190, March.
    • Handle: RePEc:cup:jfinqa:v:9:y:1974:i:02:p:181-190_01
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    Cited by:

    1. Verbeke, Alain & Brugman, Paul, 2009. "Triple-testing the quality of multinationality-performance research: An internalization theory perspective," International Business Review, Elsevier, vol. 18(3), pages 265-275, June.
    2. Quyen T. K. Nguyen, 2017. "Multinationality and Performance Literature: A Critical Review and Future Research Agenda," Management International Review, Springer, vol. 57(3), pages 311-347, June.
    3. Nguyen, Quyen T.K. & Kim, Sylvia, 2020. "The multinationality and performance relationship: Revisiting the literature and exploring the implications," International Business Review, Elsevier, vol. 29(2).
    4. Trevino, Len J. & Daniels, John D., 1995. "FDI theory and foreign direct investment in the United States: a comparison of investors and non-investors," International Business Review, Elsevier, vol. 4(2), pages 177-194, June.
    5. Yong Yang & Nigel Driffield, 2012. "Multinationality-Performance Relationship," Management International Review, Springer, vol. 52(1), pages 23-47, February.
    6. James V. Koch & Richard J. Cebula, 1994. "In Search Of Excellent Management," Journal of Management Studies, Wiley Blackwell, vol. 31(5), pages 681-699, September.
    7. Levis, Mario & Muradoğlu, Yaz Gulnur & Vasileva, Kristina, 2023. "Herding in foreign direct investment," International Review of Financial Analysis, Elsevier, vol. 86(C).
    8. Zhang, Yufeng & Yang, Zhibo & Zhang, Tao, 2018. "Strategic resource decisions to enhance the performance of global engineering services," International Business Review, Elsevier, vol. 27(3), pages 678-700.
    9. Buigues, Pierre-André & Lacoste, Denis & Lavigne, Stéphanie, 2015. "When over internationalized companies reduce their international footprint," International Business Review, Elsevier, vol. 24(6), pages 1039-1047.
    10. Lei Li, 2008. "Multinationality and technical efficiency: A neglected perspective," Management International Review, Springer, vol. 48(1), pages 39-64, February.

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