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

Author

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  • Sjoerd Beugelsdijk

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

  • Jean-François 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.

Suggested Citation

  • Sjoerd Beugelsdijk & Jean-François Hennart & Arjen Slangen & Roger Smeets, 2010. "Why and how FDI stocks are a biased measure of MNE affiliate activity," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(9), pages 1444-1459, December.
  • Handle: RePEc:pal:jintbs:v:41:y:2010:i:9:p:1444-1459
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    Cited by:

    1. Alessia Amighini & Claudio Cozza & Roberta Rabellotti & Marco Sanfilippo, 2014. "Investigating Chinese Outward Foreign Direct Investments: How Can Firm-level Data Help?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 22(6), pages 44-63, November.
    2. Randolph Bruno & Nauro Campos & Saul Estrin & Meng Tian, 2017. "Economic Integration, Foreign Investment and International Trade: The Effects of Membership of the European Union," CEP Discussion Papers dp1518, Centre for Economic Performance, LSE.
    3. repec:eee:worbus:v:52:y:2017:i:6:p:760-768 is not listed on IDEAS
    4. Martin Falk, 2013. "New empirical findings for international investment in intangible assets," WWWforEurope Working Papers series 30, WWWforEurope.
    5. Akhtaruzzaman, M. & Berg, Nathan & Hajzler, Christopher, 2017. "Expropriation risk and FDI in developing countries: Does return of capital dominate return on capital?," European Journal of Political Economy, Elsevier, vol. 49(C), pages 84-107.
    6. repec:wfo:wstudy:46891 is not listed on IDEAS
    7. Thilo Hanemann, 2014. "Chinese direct investment in the EU and the US: a comparative view," Asia Europe Journal, Springer, vol. 12(1), pages 127-142, March.
    8. Amighini, Alessia & Cozza, Claudio & Rabellotti, Roberta & Sanfilippo, Marco, 2014. "An analysis of Chinese outward FDIs in Europe with firm-level data," Papers in Innovation Studies 2014/2, Lund University, CIRCLE - Center for Innovation, Research and Competences in the Learning Economy.
    9. Lakatos, Csilla & Fukui, Tani, 2014. "The Liberalization of Retail Services in India," World Development, Elsevier, vol. 59(C), pages 327-340.
    10. Martijn Regelink & J. Paul Elhorst, 2015. "The spatial econometrics of FDI and third country effects," Letters in Spatial and Resource Sciences, Springer, vol. 8(1), pages 1-13, March.
    11. repec:spr:manint:v:58:y:2018:i:1:d:10.1007_s11575-017-0330-2 is not listed on IDEAS
    12. Jones, Chris & Temouri, Yama, 2016. "The determinants of tax haven FDI," Journal of World Business, Elsevier, vol. 51(2), pages 237-250.
    13. repec:wiw:wus046:4999 is not listed on IDEAS
    14. 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, vol. 22(1), pages 202-215.
    15. Anderson, John & Sutherland, Dylan, 2015. "Developed economy investment promotion agencies and emerging market foreign direct investment: The case of Chinese FDI in Canada," Journal of World Business, Elsevier, vol. 50(4), pages 815-825.
    16. De Beule, Filip & Duanmu, Jing-Lin, 2012. "Locational determinants of internationalization: A firm-level analysis of Chinese and Indian acquisitions," European Management Journal, Elsevier, vol. 30(3), pages 264-277.
    17. 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, vol. 22(1), pages 278-292.
    18. 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.

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