Foreign Direct Investment Relationship and Plant Exit: Evidence from the United States

23 Pages Posted: 1 Feb 2012

Date Written: January 17, 2012

Abstract

Previous research has shown that U.S. manufacturing plants belonging to U.S. multinational companies (MNCs) are more likely to shut down than other manufacturing plants, once plant and industry attributes have been controlled for (Bernard A. and Jensen B., 2007). This research has concentrated on the importance of plant characteristics and the role of the firm structure, while largely ignoring the impact of the U.S. MNCs’ foreign operations.

This study extends that research in two ways. First, this study looks at inward direct investment — that is, the U.S. manufacturing plants of foreign MNCs and not just the U.S. manufacturing plants of U.S. MNCs. The data used linked enterprise data from BEA’s survey of inward direct investment on the U.S. operations of foreign-owned MNCs with establishment data from the Census Bureau’s 1997 and 2002 Census of Manufacturing (CMF). The data are used to demonstrate that U.S. manufacturing plants of foreign MNCs are more likely to shut down than non-MNC plants and less likely to shutdown than U.S. MNCs, thereby, providing the first empirical evidence for the United States.

The second extension is the use of a unique dataset from the Bureau of Economic Analysis on the operations of foreign affiliates of U.S. MNCs to further examine their shut down decisions. The data used linked enterprise data from BEA’s outward investment survey on the foreign operations of U.S. MNCs with establishment data from the 1997 and 2002 CMF. This is the first time that these two datasets have been linked. The linked data are used to demonstrate that U.S. MNC’s domestic plants in the same industry as its foreign affiliates are less likely to close if increased production abroad serves the local market and more likely to close if increased production abroad is exported back to the United States, controlling for plant and industry attributes. Furthermore, using the foreign affiliate sales data in conjunction with coefficients derived from BEA’s Input-Output tables, we identify foreign affiliates that are suppliers to their U.S. parents’ plants (i.e., we identify vertically integrated foreign affiliates) and find that U.S. parents’ domestic plants in the same industry as a vertically integrated foreign affiliate are more likely to close than U.S. parents’ plants that are not in the same industry as a vertically integrated foreign affiliate.

JEL Classification: F20, F21, F23

Suggested Citation

Ibarra-Caton, Marilyn, Foreign Direct Investment Relationship and Plant Exit: Evidence from the United States (January 17, 2012). Available at SSRN: https://ssrn.com/abstract=1996593 or http://dx.doi.org/10.2139/ssrn.1996593

Marilyn Ibarra-Caton (Contact Author)

Bureau of Economic Analysis ( email )

1441 L Street NW
Washington, DC 20910
United States

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