Working Paper No. 741

Financial Determinants of Foreign Direct Investment

Published: April 1, 2008Keywords: FDI; Cross-border Acquisitions; Investment-q; Cost of Capital; Cross-listing; SegmentationJEL-codes: E22; F21; F23; G3; L23

Financial Determinants of Foreign Direct Investment Jens Forssbæck and Lars Oxelheim


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.

 

Lars Oxelheim

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Interdisciplinary European Studies

The European Union and the Return of the Nation State

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This book explores the complex and ever-changing relationship between the European Union and its member states. The recent surge in tension in this relationship has been prompted by the actions of some member state governments as they question fundamental EU values and principles and refuse to implement common decisions seemingly on the basis of narrowly defined national interests.

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