The Latent Heterogeneity in Investment Location Choices of Multinational Enterprises

Abstract

The heterogeneity of investing firms is an important determinant of the distribution of foreign direct investment (FDI) location decisions. This paper, for the first time, explicitly allows for firms’ heterogeneity by using a latent class discrete choice model and a new multi-level data set to examine over 1100 individual firm FDI-location decisions over an 11-year period. The highly significant empirical results show that the responsiveness of the probabilities of choices to invest in a particular country location to country-level variables differs both across sectors and across firms of different sizes and profitability. Therefore, controlling for investing firms’ heterogeneity is important if robust estimates are to be obtained.d.Latent Class model, firm heterogeneity, foreign direct investment, multi-level data