Essays on Firms' Foreign Direct Investment Decisions

Multinationals are a key part of the global economy, and many governments have made tremendous efforts to attract FDI. When a firm invests overseas, it faces two choices---a firm can either establish a new facility in its host country or purchase a local firm. These two types of foreign direct investment (FDI) are greenfield investment and cross-border mergers and acquisitions (M&A). The first chapter investigates the question: how do firms choose between the two FDI entry modes? Using a novel US firm-level dataset, I provide the first evidence that multinationals with higher levels of intangible capital systematically invest through GF rather than through M&A.

In the second chapter, I study how the firm’s choice of FDI mode affects the economy in the host country. Motivated by the result in the first chapter, I develop and quantify a general equilibrium search model of a multinational firm’s choice between M&A and GF. The model implies that equilibrium FDI patterns can be suboptimal from the host country's perspective. In particular, since the gap between the productivities of multinationals and local firms is larger in less developed countries, policymakers there can increase welfare by incentivizing FDI through M&A. By allowing highly productive multinationals to use local intangible capital, this policy increases aggregate productivity more than the laissez-faire outcome.

In the third chapter, I examine the effect of FDI on the local labor market and focus on Japanese automotive firms in the US in the 1980s. Using US census data, I investigate how much Japanese automobile firms' investments contributed to local wage increases over the 1980s. My difference-in-differences estimation shows that the effect is not significant with a whole sample, but different by race. In particular, Black workers experienced a 9.3 percent wage decrease in areas where a Japanese assembly plant opened, and I consistently observed the negative effects in regressions with other specifications. My analysis also suggests a regional difference in the wage increase, and auto workers in the West experienced a larger wage increase than workers in the other regions.