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Foreign investment decisions of European companies : a test of the oligopolistic competition model Himmelsbach, Hans-Joachim

Abstract

It is the purpose of this study to investigate the validity of the theory which states that foreign direct investment is, to a large extent, the result of oligopolistic industry structure and government intervention in a freely competitive market, and as such it is chiefly defensive investment by firms which match each others' moves. As a first step of the analysis the oligopolistic investment theory, its assumptions and implications are presented. For the purpose of statistical investigation information obtained during personal interviews with executives of forty-three internationally operating firms domiciled in seven European countries was used. Entry Concentration Indices by industry measuring degrees of defensive investment behaviour within each of the five industry groups surveyed, were calculated and correlated with variables expressing oligopolistic conditions in markets of products and factors of production. Entry Concentration Indices by country or area, expressing degrees to which all industries tended to concentrate their investments in certain countries or areas, and ECIs by industry were correlated with variables expressing home and host country government intervention in the economy, such as investment incentives, discouragement of domestic expansion and measures restricting international trade such as tariffs and other restrictive trade policies. The evidence presented appeared to justify at least partial acceptance of the hypothesis, as the existence of weak positive linkages emerged between ECIs and such variables as degree of product differentiation, market control and particularly level of technological sophistication of the parent firm. A test involving the profitability of the parent firms and their propensity to react to foreign investment decisions arrived at by their rivals tended to point out that firms operating at low or declining domestic profit margins tended to concentrate their foreign investments to a larger extent than the more profitable companies. Alternatives to oligopolistic investment behaviour, such as product diversification and licensing, proved to be undesirable courses of action to the oligopolist. Finally, it was shown that government incentives granted by the authorities of either the firms' home countries or by those of the prospective host countries proved to be ineffective in their impact upon corporate investment decisions. However penalties or restrictions used by governments appeared to have more pronounced effects upon such decisions.

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