Financial Determinants of Foreign Direct Investment

IFN Working Paper No. 741

67 Pages Posted: 8 Apr 2008

See all articles by Jens Forssbæck

Jens Forssbæck

Lund University - Department of Economics

Lars Oxelheim

Research Institute of Industrial Economics (IFN); University of Agder; Lund University

Date Written: April 1, 2008

Abstract

We argue that mainstream FDI theory underplays financial motivations for international investment, and suggest several possible channels for a distinct cost-of-capital effect on FDI. Using a sample of European firms' cross-border acquisitions, and controlling for traditional firm-level determinants of FDI, we find strong evidence in favor of a cost-of-equity effect, whereas the effect of debt costs is indeterminate. We further find that financial determinants are more important for firms originating in relatively less financially developed countries and for firms with high knowledge intensity.

Keywords: FDI, Cross-border Acquisitions, Investment-q, Cost of Capital, Cross-listing, Segmentation

JEL Classification: E22, F21, F23, G3, L23

Suggested Citation

Forssbaeck, Jens and Oxelheim, Lars, Financial Determinants of Foreign Direct Investment (April 1, 2008). IFN Working Paper No. 741, Available at SSRN: https://ssrn.com/abstract=1117948 or http://dx.doi.org/10.2139/ssrn.1117948

Jens Forssbaeck

Lund University - Department of Economics ( email )

P.O. Box 7082
S-220 07 Lund
Sweden

Lars Oxelheim (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

P.O. Box 55665
SE-10215 Stockholm
Sweden
+46 8 665 4527 (Phone)
+46 8 665 4599 (Fax)

University of Agder ( email )

Serviceboks 422
N-4604 Kristiansand, VEST AGDER 4604
Norway

Lund University ( email )

P.O.Box 7080
S-220 07 Lund
Sweden
+46462228744 (Phone)

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