154 l REGIONAL INVESTMENT PIONEERS IN SOUTH ASIA
BOX 4.1 Estimated Equation for the Determinants of Outward Investment To assess the determinants of firms’ decisions to invest abroad, the analysis considers the following empirical specification: Yisd = α + β1productivityi + β2typei + β3financei + β4networkid + β5exportid +β6enti + γZsd + λs+ λd + εisd,
(B4.1.1)
in which Yisd is an outcome of interest, such as the binary decision of firm i from source country s to invest in goods production, services operations, and trade-supporting services in destination country d. For each investment, productivityi is firm productivity; typei is firm type, including state-owned enterprise, foreign owned, and family owned; financei is firm source of financing, including internal funds, business group, home and host commercial banks, and international banks; networkid is the firm’s network in country d; exportid is the firm’s export experience in country d; enti is a characteristic (i.e., risk appetite) of the entrepreneur; Zsd is a vector of source-destination country characteristics, such as distance, contiguity, and common language; λs and λd are vectors of source and destination country dummies to control for all country-specific factors; and εisd is the error term, which is clustered at the industry level to account for potential correlations in the error term across firms in the same industry.
magnitudes, and they capture factors that are not typically quantified, yet are important for investment entry. The estimation results are presented first with standard variables, and informationrelated indicators are subsequently included. National policy (which chapter 3 has shown to be important) and other individual country characteristics are captured in the country fixed effects. INVESTORS ARE NEIGHBORS: SEEKING HIGH-CONNECTIVITY LOCATIONS The “standard” specification starts with table B.6 in appendix B, which does not include data on being well informed or on knowledge. The results show that trade costs matter, as reflected in the negative and statistically significant impact of distance on investment and the positive impact of contiguity. The impact of distance on services operations and trade-supporting investments, as reflected in the respective coefficients, is more than double that on goods production investments. This outcome is consistent with studies that find that cross-border services delivery requires greater communications with customers and a greater sensitivity to cultural aspects, and involves more complex information (Oldenski 2012). Thus, multinational enterprises from neighboring economies are more likely to be successful in cross-border investments, especially in services operations and trade-supporting investments, than in distant nations. Theoretically, the impact of trade costs on FDI is ambiguous and depends on the nature of the investment. For example, high tariffs may induce foreign investors to
