Global Fixed Capital Investment by Multinational Firms

Author Name René BELDERBOS (Katholieke Universiteit Leuven / Maastricht University / UNU-MERIT) / FUKAO Kyoji (Hitotsubashi University / Faculty Fellow, RIETI) / ITO Keiko (Senshu University) / Wilko LETTERIE (Maastricht University)
Creation Date/NO. September 2010 10-E-044
Research Project Productivity of Industries and Firms and Japanese Economic Growth
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This paper develops and tests a simple model of the simultaneous determination of gross fixed capital formation by multinational Japanese firms in home and host countries. We treat multinational firms as multi-product firms, choosing optimal investment locations and production scale for each product. We test the predictions of the model on a unique dataset covering 1707 fixed capital investment decisions by (affiliates of) Japanese multinational firms in the manufacturing sector based on research conducted in 1996 and 1997. We find that the rate of investment is not only determined by factors affecting the return on investment levels in a country (e.g. effective demand and wages), but also by wage levels in other countries in which the firm operates manufacturing affiliates. Firms facing global liquidity constraints show systematically lower investment ratios, suggesting that financing constraints are another source of interaction between investments.

Published: René Belderbos, Kyoji Fukao, Keiko Ito, Wilko Letterie, 2013. "Global Fixed Capital Investment by Multinational Firms," Economica, Vol. 80(318), pp. 274-299.