Determinants and effects of foreign direct investment: evidence from German firm-level data

• Published in: Economic policy 2005-01, Vol.20 (41), p.52-110
• Main Authors: Buch, Claudia M., Kleinert, Jörn, Lipponer, Alexander, Toubal, Farid
• Format: Article
• Language: English
• Subjects: Economic policy; Economics and Finance; Foreign investment; Globalization; Humanities and Social Sciences; Multinational corporations; Studies
• ISSN: 0266-4658; 1468-0327
• DOI: 10.1111/j.1468-0327.2005.00133.x

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, evidence on the determinants of the activities of German multinational firms is provided 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? It is found 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.