Determinants and Effects of Foreign Direct Investment: Evidence from German Firm-Level Data

59 Pages Posted: 3 Feb 2005

See all articles by Claudia M. Buch

Claudia M. Buch

Deutsche Bundesbank

Jörn Kleinert

affiliation not provided to SSRN

Alexander Lipponer

Deutsche Bundesbank

Farid Toubal

Ecole Normale Superieure de Cachan (ENS) - Departement of Economics ans Management; National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Abstract

Foreign direct investment is an essential aspect of 'globalization' yet its empirical determinants are not well understood. What we do know is based either on poor data for a wide range of nations, or good data for the US and Swedish cases. In this paper, we provide evidence on the determinants of the activities of German multinational firms by using a newly available firm-level data set from the Deutsche Bundesbank. The specific goal of this paper is to demonstrate the relative role of country-level and firm-level determinants of foreign direct investment. We focus on three main questions: First, what are the main driving forces of German firms' multinational activities? Second, is there evidence that sector-level and firm-level factors shape internationalization patterns? Third, is there evidence of agglomeration effects in the foreign activities of German firms?

We find that the market access motive for internationalization dominates. Firms move abroad mainly to gain better access to large foreign markets. Cost-saving motives, however, are important for some manufacturing sectors. Our results strongly suggest that firm-level heterogeneity has an important influence on internationalization patterns as stressed by recent models of international trade. We also find positive agglomeration effects for the activities of German firms that stem from the number of other German firms that are active on a given foreign market.

In terms of lessons for economic policy, our results show that lowering barriers to the integration of markets and encouraging the formation of human capital can promote the activities of multinational firms. However, our results related to the heterogeneity of firms and agglomeration tendencies show that it might be difficult to fine-tune policies directed at the exploitation of synergies and at the creation of clusters of foreign firms.

Suggested Citation

Buch, Claudia M. and Kleinert, Jörn and Lipponer, Alexander and Toubal, Farid, Determinants and Effects of Foreign Direct Investment: Evidence from German Firm-Level Data. Economic Policy, Vol. 20, No. 41, pp. 52-110, January 2005. Available at SSRN: https://ssrn.com/abstract=660647

Claudia M. Buch (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Jörn Kleinert

affiliation not provided to SSRN

Alexander Lipponer

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

Farid Toubal

Ecole Normale Superieure de Cachan (ENS) - Departement of Economics ans Management ( email )

France

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 rue Georges Pitard
Paris Cedex 15, F-75015
France

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