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Asia Pacific Journal of Management

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01-06-2016

Location decisions of inward FDI in sub-national regions of a host country: Service versus manufacturing industries

Authors: In Hyeock (Ian) Lee, Eunsuk Hong, Shige Makino

Published in: Asia Pacific Journal of Management | Issue 2/2016

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Abstract

Built on the differences between services and manufacturing sectors, this study examines the general proposition that service and manufacturing multinational enterprises (MNEs) have different responsiveness to location-specific characteristics when conducting foreign direct investment (FDI), and that these differences influence their final locations in the sub-national regions of a host country. Using a full population of 1,212 and 6,199 inward FDI projects conducted by MNEs in manufacturing and services sectors, respectively, across 234 sub-national regions in Korea between 2000 and 2004, it finds that the location decisions made by service MNEs are more likely to be driven by demand-side considerations, whereas those made by manufacturing MNEs are more likely to be influenced by supply-side characteristics of sub-national regions. In addition, it shows that sub-national location decisions made by both high-tech and low-tech manufacturing MNEs consider the availability of local strategic assets within a focal region more importantly than that from its neighboring regions, suggesting the importance of intra-regional effects. Sub-national location decisions made by location-bound service MNEs exhibit the same intra-regional effects for local market potential; however, those by non-location-bound service MNEs consider the local market potential from neighboring regions more importantly than that within a focal region, suggesting the existence of inter-regional effects.

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Upscaling of count variables by adding one is to keep data observations with zeros after taking logarithm (e.g., Crozet et al., 2004; Maitland, Rose, & Nicholas, 2005, among others).

All monetary values in this paragraph are measured in million KRW (1 USD = 1,158.80 KRW in Nov. 2015).

According to local government legislations in Korea, there are nine items on which local taxes are imposed: resident tax, property tax, automobile tax, and tobacco-consumption tax are four of the most prominent of the local taxes collected every year. As a result, the increased local tax collected is closely related to the increase of individuals’ income-generating activities of the year in the region, which commonly result in individuals’ decisions to live, to own properties, and to consume automobiles, tobaccos, etc. in the region of the year. As such, we expect that local tax per capita collected is highly correlated with individuals’ purchasing power in the region of the year.

Following the recommendations in Roodman (2009), we conduct three sets of specification tests to assess whether a selected set of instrument variables (IVs) are valid in the system GMM implementation: (1) Hansen’s J test; (2) Difference-in-Hansen test; and (3) AR(1) and AR(2) tests.

Since our econometric equations are log-log models, their estimated coefficient represents elasticity between relevant variables with all the other variables in each model held constant.

The results in the first column of Table 3 show that the location decisions made by manufacturing MNEs are also positively related to the local market size available in sub-national regions of a host country (p < .01). We conducted z tests under a null hypothesis that the coefficient of ln GRP _{i,t − 1} for manufacturing MNEs (i.e., β = .11) and that for service MNEs (i.e., β = .18) are equal. The test results did not reject the null hypothesis (p < .51), indicating that the difference in the coefficient sizes is statistically insignificant. However, when interpreting the results, the size of corresponding samples needs to be considered, since the number of service FDI observations is 6,199 which is more than 5 times the 1,212 manufacturing FDI observations. As a result, when there is a 1 % increase of gross regional product in sub-national regions, it will increase the number of service MNEs located therein by 11.16 firms (=6,199 × .18%) which is substantially greater than 1.33 manufacturing MNEs (=1,212 × .11%).

In Tables 6, 7, and 8, we opted not to report the effects of local innovative capabilities on location-bound versus non-location-bound service MNEs and those of local market potential on high-tech versus low-tech manufacturing MNEs, since they were shown to be mostly irrelevant for the corresponding sample’s sub-national location decisions as reported in Tables 4 and 5, respectively, above.

They are Jung, Yongsan, and Kangnam that attracted more than 500 inward FDI projects in the study period.

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Title: Location decisions of inward FDI in sub-national regions of a host country: Service versus manufacturing industries
Authors: In Hyeock (Ian) Lee
Eunsuk Hong
Shige Makino
Publication date: 01-06-2016
Publisher: Springer US
Published in: Asia Pacific Journal of Management / Issue 2/2016
Print ISSN: 0217-4561
Electronic ISSN: 1572-9958
DOI: https://doi.org/10.1007/s10490-015-9456-6

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