Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 741: Financial Determinants of Foreign Direct Investment

Jens Forssbæck () and Lars Oxelheim ()
Additional contact information
Jens Forssbæck: Lund Institute of Economic Research, Postal: P.O. Box 7080, 220 07 Lund, Sweden
Lars Oxelheim: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: We argue that mainstream FDI theory underplays financial motivations for interna-tional 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-codes: E22; F21; F23; G30; L23

67 pages, April 1, 2008

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