Journal of Korea Trade

Korea Trade Research Association (한국무역학회)
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Agglomeration Effects and Foreign Direct Investment Location Choice: Cross-country Evidence from Asia

  • Choi, Paul Moon Sub (College of Business Administration, Ewha Womans University) ;
  • Chung, Chune Young (School of Business Admin., Chung-Ang University) ;
  • Lee, Kaun Y. (School of Business Admin., Chung-Ang University) ;
  • Liu, Chang (College of Business Administration, California State University)
  • Received : 2019.09.25
  • Accepted : 2019.12.20
  • Published : 2020.02.28
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Abstract

Purpose - This study examines the determinants of foreign direct investment (FDI) location choice for Chinese firms, focusing on the agglomeration effect for firms of the same nationality. Design/methodology - The empirical data are China's inward FDI from the top 19 economies (excluding tax havens and Taiwan) in terms of FDI during 1997-2015 and China's outward FDI from the top 18 economies (excluding tax havens). This study uses a random effects generalized least squares model for panel data analysis. Findings - The results confirm that both host countries' costs and market conditions and the degree of agglomeration affect these countries' attractiveness for FDI inflows. Specifically, agglomeration has a significant effect on China's inward and outward FDI. This study confirms that the agglomeration of firms of the same nationality has predictive power for multinational enterprises' FDI location choices. The host countries' real GDP and trade openness also positively affect FDI inflows. Interestingly, however, China's production cost has a positive effect. Thus, inward FDI aimed at entering the Chinese market is increasing in recent years relative to the previous efficiency-seeking FDI. Inward FDI in China is therefore the market-entry type, whereas outward FDI by Chinese firms is the market-oriented type. Originality/value - These results suggest that the effects of the potential determinants of Chinese outward FDI are similar to those of inward FDI as China's trade liberalization progresses.

Keywords

Acknowledgement

Special thanks are due to Seok-Jae Park (Editor) and Seo-Young Lee (Associate Editor). We also thank Woo-Sung Cho, Jin-Seob Kim, and participants of the Korea Trade Research Association 2019 Spring Conference. The authors contributed equally to this work. Yun Joo An provided excellent research assistance. The standard disclaimer applies, and all errors are our own.

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