Heterogeneous Investment Motives and Location Choice of Foreign Direct Investment in the United States

Abstract

Since firms conduct FDI for different reasons, we examine FDI location choice while accounting for both the locations' and the firms' traits using a random parameter logistic regression. Firm traits, as indirect indicators of likely motives, determine whether and how much a firm will value locations' traits. For FDI into the US during 1987-1993, we find that firms differentially value states' technical capabilities. Importantly, firms that have relatively low R&D intensity locate in states where more technical capabilities reside. This finding suggests that while some firms typically expand to use existing capabilities in new markets, many others do expand to seek technical capabilities resident abroad.

Keywords: FDI, location choice, firm heterogeneity, random parameter logit

JEL Classification: F23, R30, L21