Location theory: Empirical Research on FDI Location
Empirical studies of FDI location have typically used one of two general research designs. First, using aggregate data on FDI flows into different countries, researchers have studied the correlation between aggregate FDI flows and many of the location characteristics discussed earlier. The problem with this type of research design is that FDI locations are chosen by individual firms, and aggregate data do not give usmuch insight into themicromechanisms underlying firms’ choices.
The second type of research design uses micro data on multinational firms to examine decisions to enter particular markets. Entries are generally observed as discreet data points. For example, anMNC that has operations in Canada and the United Kingdom in 1989, and then has operations in Canada, theUnited Kingdom, and France in 1990, has ‘‘entered’’ France. Although entry data give us much more insight into decisions at the firmlevel, there are two problems with using this type of research design in studies of FDI location. First, with only a few exceptions, publicly available data on MNCs that contain reliable information on entries often do not contain information on the size of the entry or the purpose of the entry (e.g., production facility, R&D lab, distribution operation, etc.). Second, and perhaps more important, most location decisions made byMNCs are incremental.MNCsmight choose, for example, to reduce the scope of their existing operations inCanada and double the scale of their existing facilities in India. If the researcher only observes countries in which the MNC has operations, no location change would be noted. In this example, however, there has been a fundamental shift in the locations in which the MNC operates. In the dayto- day operations of MNCs, the decision to enter a new market is made relatively infrequently. In contrast, MNCs with established subsidiaries in many different markets frequently make decisions about how much to reinvest in their existing foreign operations.
A consequence of the widespread use of entry studies in research on FDI location is that we know very little about how the location characteristics that are correlated with MNCs’ entry decisions affect decisions about growing or shrinking existing operations at themargin (see Feinberg and Keane 2001). Froma policy standpoint,most countries are at least as concerned about retaining, growing, and upgrading existing FDI as they are concerned about luring new FDI. Therefore, additional research on MNCs’ incremental FDI location choices could contribute significantly to FDI policy.