Global Fixed Capital Investment by Multinational Firms

Abstract

We develop and test a model of the simultaneous determination of global gross fixed capital investments by multinational firms. We integrate a model of multi-product firms choosing optimal manufacturing locations with a model of dynamic investment optimization. Firms adjust capital stocks in each location in accordance withe the expected marginal profitability of capital. Analysis of 1504 fixed capital investment decisions by Japanese multinational firms confirms the prediction that investment is not only determined by total factor productivity, effective demand, and wage levels in the host country, but also by wage levels in other countries in which the firm operates.

Keywords: multinational firms, foreign direct investment, fixed capital investment

JEL Classification: D24, D92, F23