Determinants of the United States foreign direct investment to leading European countries

In the last quarter century, United States foreign direct investment has been growing and in the last decade accelerating, where today it is a bitter and controversial subject. Considerable interest and concern is expressed by the media, the public and above all 1996 presidential candidates, where they have focused on the justification and scope behind the United States foreign direct investment flows--the data on the book value of the United States foreign direct investment justifies this concern. However, preliminary investigation on the literature of the United States foreign direct investment to industrialized countries revealed that the topic has long been neglected and above all little empirical work was done. Thus, there was a need to understand and shed light on this international economic process that is currently growing a record rate of 12 percent annually for the United States direct investment abroad. This dissertation attempted to empirically and statistically analyze the motives, trends and pattern behind the United States direct investment abroad, the study concentrated particularly on the United Kingdom, Germany, France, The Netherlands, and Italy, that currently absorb more than 34 percent of total book value of the United States direct investment abroad. Ordinary least-square regression method and data from 1950 to 1994 was used to rigorously assess and evaluate the determinants of the United States direct investment to these five countries. There are several important conclusions that emerge from this study. This dissertation unambiguously supports the tariff discrimination hypothesis. The results empirically confirm that increase trade between these five countries has occurred and imposing tariffs and nontariff barriers have discriminated against the United States exports and have forced an increase in the United States direct investment flows. The model unequivocally confirms that the United States direct investment has increased to these countries because of their large markets and high capital expenditure. In addition, this study empirically and statistically confirmed that these five countries\u27 differential lower labor cost and higher productivity has attracted United States capital. Furthermore, direct investment to these five industrialized countries and exports were found to be complement in nature. On the other hand, weak evidence is demonstrated by the growth of these five countries\u27 gross domestic product to attract United States direct investment. Structural tests performed in 1958 and 1985 indicate that no change has occurred in the United States direct investment to the United Kingdom, Germany and France. Thus, direct investment flows to these countries is more of a gradual process rather than a sudden shift. On the other hand, structural changes at 5 percent level occurred in the United States direct investment to The Netherlands in 1958 and 1985, and to Italy in 1958 and 1985