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The Role of Home and Host Country Characteristics in FDI: Firm-Level Evidence from Japan, Korea and Taiwan

Discussion Papers

No.267

by Kazunobu HAYAKAWA, Hyun-Hoon LEE Donghyun PARK
December 2010

ABSTRACT

There is a large and growing empirical literature that investigates the determinants of outward foreign direct investment (FDI). This literature examines primarily the effect of host country characteristics on FDI even though home country characteristics also influence the decision of firms to invest abroad. In this paper, we examine the role of both host and home country characteristics in FDI. To do so, we constructed a firm-level database of outward FDI from Japan, Korea, and Taiwan. Our empirical analysis yields two main findings. First, host countries with better environment for FDI, in terms of larger market size, smaller fixed entry costs, and lower wages, attract more foreign investors. Second, firms from home countries with higher wages are more likely to invest abroad. An interesting and significant policy implication of our empirical evidence is that policymakers seeking to promote FDI inflows should prioritize countries with higher wages.

Keywords: FDI; Multinational firm; Firm heterogeneity; Productivity
JEL classification: F21, F23, D24

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