The Determinants of Foreign Investment Size: The Role of Parent Firm and National Distance

Abstract

Investment size has been overlooked by scholars who study foreign direct investment (FDI). This overlook hinders our understanding of globalization, because the study of investment size will shed light on how firms of different sizes develop and participate in the current trend of globalization, and on how entry barriers influence the pattern of FDI. To fill in the gap in the literature, we develop an economic model of foreign investment size. From this model, we predict the determinants of foreign investment size: it is positively related to parent firm size, while it follows an inverted U-shape relationship with national distances. Moreover, parent firm size and national distance also interact with each other to influence investment size. Our empirical analysis of Japanese FDI data from 1985 to 2003 supports our arguments.