Finance-Specific Factors as Drivers of Cross-Border Investment - An OLI Perspective

Abstract

In this paper we empirically test the role of firm-specific financial characteristics as drivers of international investment and production. We hypothesize that financial strength generates advantages that can be exploited through cross-border investment activity. The hypothesis is tested in a series of binary-response models, using a sample of 1379 European non-financial firms' international acquisitions. Controlling for traditional firm- and target-country-specific FDI determinants within an OLI framework, we find strong evidence that financial factors play a significant role in explaining cross-border investment. We conclude that without explicit consideration of the financial dimension, firms' FDI decisions cannot be properly understood.

Keywords: FDI, OLI, cross-border acquisitions, cost of capital, financial strategy, financial variables

JEL Classification: E22, F21, F23, L23