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The geography of international investment

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Author Info
Shatz, Howard J.
Venables, Anthony J.

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Abstract

Much foreign direct investment is between high-income countries, but investment in some developing and transition regions, while still modest, grew rapidly in the 1990s. Adjusting for market size, much investment stays close to home; adjusting for distance, much heads toward the countries with the biggest markets. Foreign direct investment is more geographically concentrated than either exports, or production. Thus, U.S. affiliate production in Europe, is 7 times US exports to Europe; that ratio drops to 4 for all industrial countries, and to 1.6 for developing countries. Multinational activity in high-income countries is overwhelmingly horizontal, involving production for sale to the host country market. In developing countries, a greater proportion of multinational activity is"vertical", involving manufacturing at intermediate stages of production. Thus, only four percent of US affiliate production in the European Union (EU) is sold back to the United States, whereas for developing countries, the figure is eighteen percent, rising to forty percent for Mexico. Similarly, less than ten percent of Japan's affiliate production in the EU is sold back to Japan, compared with more than twenty percent in developing countries. In models of horizontal activity, the decision to go multinational, is a tradeoff between the additional fixed costs involved in setting up a new plant, and the savings in variable costs (transport costs, and tariffs) on exports. In models of vertical activity, direct investment is motivated by differences in factor prices) and discourage it (by making trade between headquarters , and an affiliate more expensive). The major outward investors carry out much horizontal investment in large markets. For US investors, this means Europe, especially the United Kingdom; for Japan and Europe, it means the United States. Most EU investments, however, stay within the EU. The major outward investors carry out much of their vertical investment closer to home: the United States, in Mexico; the EU, in Central and Eastern Europe; Japan, in Asia.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2338.

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Date of creation: 31 May 2000
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Handle: RePEc:wbk:wbrwps:2338

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Keywords: Payment Systems&Infrastructure Economic Theory&Research Environmental Economics&Policies Labor Policies International Terrorism&Counterterrorism TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT Foreign Direct Investment Economic Theory&Research Environmental Economics&Policies Trade and Regional Integration

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  6. Blonigen, Bruce A, 1997. "Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment," American Economic Review, American Economic Association, vol. 87(3), pages 447-65, June. [Downloadable!] (restricted)
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  8. Froot, Kenneth A & Stein, Jeremy C, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1191-217, November. [Downloadable!] (restricted)
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  9. Audretsch, David B, 1998. "Agglomeration and the Location of Innovative Activity," CEPR Discussion Papers 1974, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394 Elsevier. [Downloadable!] (restricted)
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  15. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, 03.
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  19. Feenstra, Robert C. & Hanson, Gordon H., 1997. "Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras," Journal of International Economics, Elsevier, vol. 42(3-4), pages 371-393, May. [Downloadable!] (restricted)
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  20. Markusen, James R. & Venables, Anthony J., 1998. "Multinational firms and the new trade theory," Journal of International Economics, Elsevier, vol. 46(2), pages 183-203, December. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ottaviano, Gianmarco I P & Turrini, Alessandro Antonio, 2003. "Distance and FDI When Contracts are Incomplete," CEPR Discussion Papers 4041, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. C. Bellac & R. Riegler, . "Proximity-Concentration Trade-Off," FIW Research Reports series 22, FIW. [Downloadable!]
  3. Gilles Duranton & Henry G Overman, 2006. "Exploring the Detailed Location Patterns of UK Manufacturing Industries using Microgeographic Data," Working Papers tecipa-248, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  4. Lionel Artige & Rosella Nicolini, 2005. "Evidence on the Determinants of Foreign Direct Investment: The Case of Three European Regions," UFAE and IAE Working Papers 655.05, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
    Other versions:
  5. Ewe-Ghee Lim, 2001. "Determinants of, and the Relation Between, Foreign Direct Investment and Growth: A Summary of the Recent Literature," IMF Working Papers 01/175, International Monetary Fund. [Downloadable!]
  6. Becker, Sascha O. & Ekholm, Karolina & Jäckle, Robert & Mündler, Marc-Andreas, 2005. "Location choice and employment decisions : a comparison of German and Swedish multinationals," Discussion Paper Series 1: Economic Studies 2005,08, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  7. Joel Deichmann & Socrates Karidis & Selin Sayek, 2003. "Foreign direct investment in Turkey: regional determinants," Applied Economics, Taylor and Francis Journals, vol. 35(16), pages 1767-1778, November. [Downloadable!] (restricted)
  8. Richard Mash, 2000. "Host Country-Foreign Investor Bargaining Power and Investment Incentive Provisions in Multilateral Investment Agreements," Economics Series Working Papers 047, University of Oxford, Department of Economics. [Downloadable!]
  9. Marcella Alsan & David E. Bloom & David Canning, 2004. "The Effect of Population Health on Foreign Direct Investment," NBER Working Papers 10596, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Gordon H. Hanson & Raymond J. Mataloni, Jr. & Matthew J. Slaughter, 2001. "Expansion Strategies of U.S. Multinational Firms," NBER Working Papers 8433, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Barba Navaretti, Giorgio & Checchi, Daniele & Turrini, Alessandro Antonio, 2003. "Adjusting Labour Demand: Multinational versus National Firms- A Cross-European Analysis," CEPR Discussion Papers 3751, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Braconier, Henrik & Ekholm, Karolina, 2001. "Foreign Direct Investment in Central and Eastern Europe: Employment Effects in the EU," CEPR Discussion Papers 3052, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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