Firm-Specific Factor Market Constraints and FDI: Evidence from Germany
Firms that invest abroad are large and more productive than their domestic counterparts. But to what extent are the international activities of firms also driven by differences across firms in terms of their access to external finance and the labor market conditions that there are facing? In this paper, we present new empirical evidence based on a detailed micro-level dataset of German firms. Our paper has three main findings regarding the firm-level determinants of FDI. First, in line with earlier literature, we find a positive impact of size, productivity, and R&D activity on firms’ FDI activity. Second, labor market conditions have a mixed impact on FDI. Personnel shortage tends to have a significantly positive impact on the probability to invest abroad, whereas wage cost problems and the existence of collective bargaining agreements have a negative effect. Third, financial constraints have a mixed impact as well. While self-reported financial constraints do not significantly affect FDI activity, cash flow has a positive impact.
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