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Why and how FDI stocks are a biased measure of MNE affiliate activity

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Author Info

  • Sjoerd Beugelsdijk

    (Department of International Business & Management, University of Groningen, The Netherlands)

  • Jean-Fran�ois Hennart

    (CentER and Department of Organization & Strategy, Tilburg University, The Netherlands)

  • Arjen Slangen

    (International Strategy & Marketing Section, University of Amsterdam, The Netherlands)

  • Roger Smeets

    (CPB Netherlands Bureau for Economic Policy Analysis & Department of International Economics and Business, University of Groningen, The Netherlands)

Abstract

Many international business (IB) studies have used foreign direct investment (FDI) stocks to measure the aggregate value-adding activity of multinational enterprises (MNE) affiliates in host countries. We argue that FDI stocks are a biased measure of that activity, because the degree to which they overestimate or underestimate affiliate activity varies systematically with host-country characteristics. First, most FDI into countries that serve as tax havens generate no actual productive activity; thus FDI stocks in such countries overestimate affiliate activity. Second, FDI stocks do not include locally raised external funds, funds widely used in countries with well-developed financial markets or volatile exchange rates, resulting in an underestimation of affiliate activity in such countries. Finally, the extent to which FDI translates into affiliate activity increases with affiliate labor productivity, so in countries where labor is more productive, FDI stocks also result in an underestimation of affiliate activity. We test these hypotheses by first regressing affiliate value-added and affiliate sales on FDI stocks to calculate a country-specific mismatch, and then by regressing this mismatch on a host country's tax haven status, level of financial market development, exchange rate volatility, and affiliate labor productivity. All hypotheses are supported, implying that FDI stocks are a biased measure of MNE affiliate activity, and hence that the results of FDI-data-based studies of such activity need to be reconsidered.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal Journal of International Business Studies.

Volume (Year): 41 (2010)
Issue (Month): 9 (December)
Pages: 1444-1459

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Handle: RePEc:pal:jintbs:v:41:y:2010:i:9:p:1444-1459

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Cited by:
  1. Amighini, Alessia & Cozza, Claudio & Rabellotti, Roberta & Sanfilippo, Marco, 2014. "An analysis of Chinese outward FDIs in Europe with firm-level data," CIRCLE Electronic Working Papers, Lund University, CIRCLE - Center for Innovation, Research and Competences in the Learning Economy 2014/2, Lund University, CIRCLE - Center for Innovation, Research and Competences in the Learning Economy.
  2. Dikova, Desislava & Smeets, Roger & Garretsen, Harry & Van Ees, Hans, 2013. "Immediate responses to financial crises: A focus on US MNE subsidiaries," International Business Review, Elsevier, Elsevier, vol. 22(1), pages 202-215.
  3. Papageorgiadis, Nikolaos & Cross, Adam R. & Alexiou, Constantinos, 2013. "The impact of the institution of patent protection and enforcement on entry mode strategy: A panel data investigation of U.S. firms," International Business Review, Elsevier, Elsevier, vol. 22(1), pages 278-292.
  4. Thilo Hanemann, 2014. "Chinese direct investment in the EU and the US: a comparative view," Asia Europe Journal, Springer, Springer, vol. 12(1), pages 127-142, March.
  5. Kim, Phillip H. & Li, Mingxiang, 2014. "Injecting demand through spillovers: Foreign direct investment, domestic socio-political conditions, and host-country entrepreneurial activity," Journal of Business Venturing, Elsevier, vol. 29(2), pages 210-231.
  6. Martin Falk, 2013. "New empirical findings for international investment in intangible assets," WWWforEurope Working Papers series, WWWforEurope 30, WWWforEurope.

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