The extent, determinants and effects of outward investment is a topic of great anxiety in developed countries. When continental Europe is primarily concerned by the possible disappearance of its manufacturing base, the United States and the United Kingdom sound more worried about offshoring of services. Those fears can actually lead to drastic changes in policy decisions. In this paper, we address one of the most pressing question about offshoring, whether investment abroad by multinational firms substitutes for investment at home. Using firm-level data on French investments, both in France and abroad, over the 1992-2002 period, we investigate the determinants of location choice, and assess empirically whether the domestic economy is loosing attractiveness over the recent period, as often claimed in the public debate.
The main originality of this work is thus to address together the decision to invest abroad rather than in France, and the location choice, conditional on firms having decided to invest abroad. Moreover, as our data cover a large set of foreign locations, it is possible to envision location choices in a broad perspective, where the whole geographical structure of the firm is taken into account. In particular, we build a financial network variable describing the strength of financial linkages that a given investor has in each country of the world (including France) due to previous investments there. This determinant turns out to be an important one in subsequent location decisions, and also a key factor in explaining the differences between investment at home and investment abroad.
Our empirical strategy lies on a theoretically-consistent nested logit model. In a new trade framework à la Krugman (1991) where domestic and foreign fixed costs of investing differ, we show that the firm’s investment strategy can be decomposed into two decisions: the decision to invest in France or abroad and the choice of a foreign location conditional on the firm having opted for FDI. The second step lies on a comparison of operational profits expected from each foreign location, that depends on country-specific variables as the country’s market access or the price of factorial inputs, as well as firm/country-specific features, notably the firm’s financial network in each possible location. As for the choice of investing in France or abroad, we show that it depends on the same determinants as well as on firm-specific features like its productivity or its intangible assets.
Results of the nested logit estimation are consistent with these theoretical predictions. First, restricting the analysis to foreign investments allows us to confirm most of previous results found in the related literature. The probability for a country to be chosen as recipient of FDI flows is shown to be positively correlated with the country’s market potential, its cultural proximity to France and its access to intermediate goods. On the contrary, this probability is reduced for distant countries with higher factorial prices. Importantly, our measure of the firm’s financial network abroad is also shown to affect location choices, the probability for a country to be chosen as location being all the higher since the firm’s network over there is more developed.
Enlarging the sample to investments in France shows a strong bias from French firms in favor of domesting investments: the odds ratio of investing in France rather than in a country of comparable market access, distance, GDP per capita and same count of firms in the industry is slightly over ten. However, a large share of this “excessive” domestic investment can be accounted for by the supply access variable and, above all, the much higher financial linkages of investors in their domestic economy.
Last, we ask formally for the determinants of the residual French exception that makes firms “over-invest” in their home country. The decision to make FDI instead of exporting from France is shown to be positively correlated with the firm’s size and productivity, as suggested by Helpman et al. (2004). Moreover, firms with more intangible assets are more prone to invest abroad, to benefit from scale economies on these firm-specific fixed costs.