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Location characteristics of manufacturing investments in the U.S.: a comparison of American and foreign-based firms.


Between 1980 and 1990, Foreign Direct Investment in the United States [FDIUS] increased dramatically (particularly in the late eighties) growing by more than 400 percent (Choate 1993). This FDIUS growth has inspired considerable research and media focus on various related issues, ranging from the economic growth effects to national sovereignty implications of such foreign investment. One area of interest concerns the location of FDIUS, involving location determinant issues on why and how foreign investors select their U.S. site of operations. Academicians, managers of multinational corporations investing in the U.S., state and local economic developers and policymakers have all been interested in the locational aspects of FDIUS. Various U.S. locations have aggressively marketed their respective sites to potential foreign investors, competing against rival communities by offering a significant amount of incentives ranging from employee training to tax breaks.

After peaking in 1988 with a record high of $ 73 billion, this growth of FDIUS declined in the past four years, falling 47 percent to $14 billion in 1992. (U.S. Department of Commerce 1993 a). Nevertheless, FDIUS has shown signs of resurgence for 1993 (U.S. Department of Commerce 1993 b). Foreign investment in the United States remains significant with a total of over [section] 400 billion by 1990. The United States still remains quite attractive to many foreign multinational companies due to favorable factors such as the promise of a huge, integrated market that could be enhanced through a North American Free Trade Agreement, relatively lower wages, and a way to avoid any increase in trade barriers.

To contribute to a better understanding of the needs of foreign multinational investors in the U.S. relative to domestic counterparts, this paper identifies and examines location factors that are considered important by manufacturing firms.

Literature Review

Given the background on industrial location and the increased interest in FDIUS in the seventies, a selection of empirical and descriptive literature began to look into the area of foreign investment location in the United States (Daniels 1970, Foster 1976, Tong 1979). Subsequent studies such as Schmenner (1982), Carlton (1983), Bartik (1985), and Newman and Sullivan (1988) were limited to location decisions of domestic companies establishing branch plants, and focused on specific factors affecting location. Additional research that focused on foreign firms in the U.S. were Mandell and Killian (1974), Little (1978) and Arpan (1981), McConnell (1980), Hartman (1984), and Boskin and Gale (1987).

Econometric research was done by Glickman and Woodward (1988) and Glickman et al. (1989), and a number of studies preferred using a conditional logit framework to analyze Department of Commerce statistics (for example, Coughlin, Terza, and Arromdee 1991, Woodward 1992, Friedman, Gerlowski, and Silberman 1992). Research has also focused on specific investments such as Japanese FDI in the U.S. Cole and Deskins (1988) and Tyson (1992) examined Japanese automakers. Others, such as Mann (1993), concluded that industry-specific factors influence direct investment behavior, while Ondrich and Wasylenko (1993) discussed the reasons behind FDI location in particular states within the U.S., and the effectiveness of government policy measures designed to attract FDI.

In examining the contrast between domestic and foreign location decisions, studies have suggested and provided evidence that foreign firms behave differently from their domestic counterparts (Daniels 1970, Foster 1976, Little 1978, Glickman et al. 1989). However, further research (for example, Swamidaas 1990) found that foreign direct investors are increasingly behaving more like domestic firms when it comes to the location decision.

In addition to the distinction between foreign and domestic firms, other research has indicated that the importance of location factors could differ according to the country of the manufacturing investor. Nationality differences stem from a myriad of cultural and economic influences translated into differences in firm behavior regarding location choice. Authors such as Chernotsky (1983), Schollhammer (1974), Tong (1979), have found that firms of different nationalities weigh location factors differently. This is supported by Friedman, Gerlowski, and Silberman (1992) who found that the decision factors for Japanese and European MNCs were different.

Previous literature reveals two primary streams of research. Earlier studies primarily involved survey research investigating companies engaged in FDI in the U.S. More recent studies relied more on econometric approaches to location using secondary data. This paper returns to the former, and offers both a more recent and richer appraisal than earlier survey literature.

Research Questions

A review of past research and the questions they have raised has indicated a need for an updated large scale survey, which includes both a foreign and domestic sample to facilitate more direct comparisons. This study therefore, addressed the following questions:

(1) What are the important location-specific attributes that affect the manufacturing location decision?

(2) How do domestic and foreign firms compare regarding important location factors? Specifically, how do U.S., Japanese and German firms compare? And have these dimensions changed in recent years?



A nationwide mail survey was used with the population of interest defined as all manufacturing investors in the United States. Manufacturing investors were considered foreign if they met the following requirements:

* 10 percent or more of firm ownership was non-U.S. (based on U.S. Department of Commerce criteria).

* the firm was involved in a manufacturing industry, producing value-added physical products. Companies in service and non-value added extractive industries were excluded.

* the firm had at least one operational facility in the U.S. indicating that a location decision had been made in the past.

The specific manufacturing firm nationality was defined as United States (domestic; American) if 91 percent or more of firm ownership was U.S. as Japanese if 10 percent or more of firm ownership was Japanese, as German if 10 percent or more of firm ownership was German (derived from the U.S. Department of Commerce definition used for most classifications). However, the reader is assured that in this study the percentages of ownership for the majority of German and Japanese firms surveyed were significantly greater than 10 percent. For example, only six percent of non-domestic respondents were less than 30 percent foreign-owned.

The population included domestic as well as foreign manufacturing firms in the U.S. The latter numbered over 5,000 by 1984. The sample size for the study was 1300 firms, consisting of 1000 foreign and 300 U.S. investors. The population was drawn from at least four published directories using stratified random sampling. The stratification scheme applied was on the basis of nationality and geography (state level). In terms of nationality, a non-proportionate method (non-proportionate to the population proportion) was used. The U.S., Japanese and German firms were intentionally oversampled since the study was particularly interested in variations across these groups. On the basis of geography, a proportionate (to the population proportion) approach was used as geographic representativeness was sought.

Survey Design

The pilot-tested questionnaire was addressed to a specific top management individual in the firm or agency who was deemed knowledgeable of the information sought. The survey presented a list of 58 location-specific attributes in the main section. These attributes were derived from previous empirical survey studies (For example, Tong 1979). Using a seven-point Likert scale, the respondents were asked to rate the importance of each attribute when their firm selected a particular community in which to locate their facility. The questionnaire also asked for firm-specific characteristics such as nationality. Consequently, 305 responses (a 24 percent response rate) were used.

Data Analysis

About one-fourth of the respondents were domestic or American (77 firms), while 75 percent were non-U.S. (228) responses. Japanese firms amounted to 69 respondents (22 percent) with 40 German companies (13 percent) responding. The rest of the foreign-based firms (119 responses) came from countries such as the United Kingdom (10 percent), Canada (six percent), Netherlands (five percent), Switzerland (4 four percent), France (four percent) Italy (three percent), and other European developed nations (five percent) as well as developing nations (five percent). A large part of the respondents (41 percent) came from the three industries of Chemicals and Allied Products (14 percent), Industrial Machinery (13 percent) and Electronics (14 percent).

The means and standard deviations of the respondents' ratings of the 58 attributes were derived for each attribute. Varimax-rotated common factor analysis was next used to determine the underlying primary factors governing the large number of 58 location attributes. Attributes with factor loadings greater than 0.4 were grouped for each factor derived. Labels were given to each factor based on the nature of the significant attributes identified. As a result, the main factors and their corresponding location attributes were identified (see Appendix for main factors and attributes which loaded most highly for the factors). Corresponding statistics such as percent of variance explained (PVE) and cumulative percentage of variance explained (CPVE) were also derived.


Top Location Attributes

Manufacturing Firms

Table 1 provides the 58 location attributes (arranged according to the main factors identified previously through factor analysis and listed in the Appendix) for the entire manufacturing sample, based on five categories of analysis: 1) Total Sample of manufacturing firms, 2) U.S. manufacturing firms, 3) Japanese manufacturing firms, 4) German manufacturing firms, and 5) Other foreign manufacturing firms (excluding Japanese and German firms). The 58 location attributes for each of the preceding categories were listed with their corresponding means and standard deviations. The attributes were then compared across categories, identifying differences and similarities. Differences across categories were tested for significance using a t-test on three confidence levels.

Based on their respective means, the top ten location-specific attributes were also ranked. Out of the 58 attributes used, the top ten for the overall sample were: 1) "Availability of Utilities", 2) "Availability of Suitable Plant Sites", 3) "Space for Expansion", 4) "Attitudes of Local Government", 5) "Labor Productivity", 6) "Local Salary and Wage Levels", 7) "Local Labor Attitudes", 8) "Transportation Services Availability", 9) "Cost of Utilities" and 10) "Labor Turnover Rate".

American, Japanese and German Manufacturing Firms

Table 1 further shows the location-specific attributes for Japanese and German companies, including the respective top ten rankings based on means. Results again indicated a general overall difference from the domestic list.

At the top ten level of analysis, Japanese firms significantly considered "Attitudes of Local Government", "Attitudes of Local Citizens", "Transportation Services Availability", and "Employee Training Incentives" to be more important attributes relative to their American counterparts. In further contrast to U.S. firms, German firms tended to significantly weigh "Level of Unionization", "Labor Turnover Rate", "Attitudes of Local Government", and "Transportation Services Availability" as more important.

Differences also existed between Japanese and German manufacturing investors. Japanese firms significantly ranked "Attitudes of Local Citizens" higher than German investors. On the other hand, the "Level of Unionization" seemed to significantly influence German companies more than the Japanese.

In addition, results throughout the rest of the 58 attributes continued to support a general overall difference from the domestic list. Relative to the American [TABULAR DATA FOR TABLE 1 OMITTED] companies, the Japanese firms surveyed considered the general community environment (including education, housing etc.) as significantly more important. The Japanese also paid closer attention to land and construction costs. In addition, input logistics such as "Nearness to Suppliers" and "Nearness to Input Sources" were given significantly more priority than market logistics. In terms of synergy proximities, it is interesting that the Japanese regarded "Nearness to Other Firms of the Same Nationality" as more important than Americans, but considered "Nearness to Other Parent-owned Plants" as less important. Similar to foreign firms in general, the Japanese also showed greater concern over "Management Personnel Availability", local government and citizen attitudes, and "Trade Facilities". Interestingly, the Japanese placed the most importance on "Employee Training" and "Nearness to Third Country Operations" relative to other foreign firms, and significantly relative to U.S. companies. The Japanese firms seemed to place significantly less emphasis on capital concerns and local/state taxes and tax breaks.

Similar to their Japanese counterparts, the German executives surveyed also placed a higher premium on land and transportation costs, and proximity to inputs. Additionally, the German firms also considered "Transportation Costs" and "Availability of Seaports" as significantly more important, relative to American companies. The Germans were significantly less concerned with "Nearness to Other Parent-owned Plants", "Nearness to Non-US Markets" and "Free Trade and Enterprise Zones". Like the other foreign manufacturers, including the Japanese sample, German firms attached a lower importance rating to taxes and tax breaks, and "State Financial Assistance" when compared to Americans. In contrast to both the Japanese and Americans, the German firms placed the significantly lowest importance rating to "Unskilled Labor Availability", across all groups.

American and Other Foreign Manufacturing Firms

The top ten rankings based on means are also given (Table 1) for the "American Manufacturing" group and the "Other Foreign Manufacturing in the U.S." group (excluding Japanese and German firms). In comparison, there was an overall general difference between the two groups from both the top ten level and the 58-attribute perspective. Focusing on the top ten attributes, the difference was significant for three factors that foreign firms seem to consider more important than domestic firms: "Cost of Suitable Land", "Space for Expansion", "Transportation Services Availability", and "Skilled/Technical Labor Availability." On the other hand, American firms were significantly more concerned than foreign firms over tax considerations, with higher ratings for "State Tax Rates", "Local Tax Rates", "State Tax Breaks" and "Unionization Level." However, strong similarities existed between foreign and domestic firms with the significance of "Availability of Utilities", "Availability of Suitable Plant Sites", and labor considerations such as "Labor Productivity" and "Local Salary and Wage Levels."

Differences also emerged when considering the rest of the attributes. In comparison to their American counterparts, the other foreign companies considered construction costs as significantly more important. Expectedly, foreign firms significantly placed a higher level of relative importance on "Trade Facilities", including seaports.

Interestingly, the foreign respondents attached a significantly lower level of importance to capital concerns, to "Site Improvements", "Size of Community", "Nearness to Other Parent-owned Plants", and "Availability of Unskilled Labor". Again, as further evidence of less concern over financial and tax matters relative to their U.S. counterparts, foreign firms placed significantly less importance on incentives regarding state/local financial assistance and local tax breaks.

Top Location Factors

Factor Scores Across Nationality

Through factor analysis of the location attributes, seven factors were derived. The mean of the factor scores were grouped by nationality and compared for significance. Significant differences were found between the Non-US group and the US group rankings of the locations factors. The results indicated that, as a whole, the Non-US respondents significantly regarded "Incentives" with less importance compared to their American counterparts (p[less than]0.01). On the other hand, foreign investors felt that "Community Environment", "Land and Transport Services" (p[less than]0.01), and "International Concerns" (p[less than]0.05) are relatively more important.

In particular, the Japanese manufacturers attached a significantly higher level of importance to "Community Environment" and "Land and Transportation Services" than did their domestic colleagues (p[less than]0.01). In further contrast to U.S. manufacturers, the German investors surveyed significantly regarded "Land and Transportation Services" higher, but attached a lesser importance to "Incentives" (p[less than]0.01).

Industry Considerations

Since a considerable portion of responses came from firms in five major industries, the results based on nationality could have been confounded by industry effects. Therefore, the location attributes were analyzed from an industry perspective. Table 2 provides the attributes rated on importance based on the Chemical, [TABULAR DATA FOR TABLE 2 OMITTED] Rubber and Plastics, Metal products, Industrial Machinery and Electronics industries. These industries were chosen as they made up 63.9 percent of the sample size. Each of the industries had sample sizes of at least 38 firms.

The results provided several industry traits with Metal Products rating the highest overall levels of importance, followed by the Chemical industry. Both industries tended to rate most of the same attributes with a high level of importance. Firms in the Rubber and Plastics industry were most concerned with "Employee training" and other forms of assistance including tax breaks. Electronic firms considered tax rates with the highest level of importance. Companies involved with industrial machinery rated exporting related attributes and site/infrastructure development incentives with the lowest importance. Respondents in the industrial machinery sector did not rate any attributes at the highest level of importance relative to the other industries. Transportation and logistic matters, cost of utilities, non-financial incentives and local/labor attitudes were most important to the Chemical industry with the highest ratings relative to other industries. Community environment, capital concerns, unions and unskilled labor availability were rated with the highest importance by firms in Metal Products.

Based on industry functions and characteristics, these observations can be intuitively expected. The results may have an industry skew with certain groups of questions such as "Skilled" vs. "Unskilled Labor" concerns, or the fact that industry-specific tax breaks need to be accounted for when dealing with taxes. For some attributes, the results support the existence of industry effects. For example, in examining "Availability of Seaports" there was evidence for industry influence. Industry analysis indicated that the Metal Products sector rated this attribute with very low importance. Since firms in this sector are relatively prevalent in the U.S. and Japanese sample, this may explain why respondents from these countries considered the attribute with low importance. German firms rated the attribute higher possibly since the German sample did include respondents in the Metal Products category to lower the mean. Therefore, there was some indication that an industry effect for particular attributes may have occurred where industry characteristics were very strong.

However, overall industry effects were mixed with no consistent patterns of significance. For example, while the Japanese firm sample had a high involvement in the Electronics and Metal Products sector, analysis by industry did not explain why Japanese significantly considered capital concerns with lower importance. In another example, industry results did not explain why the Japanese or German firms regarded community environment attributes with significantly higher importance than their U.S. counterparts.

Due to the small industry sample sizes, it is beyond the scope of this paper to meaningfully statistically analyze the effect industry characteristics may have on nationality differences. However, from Table 2 it is evident that industry could play a role for certain attributes.

Discussion and Managerial Implications

In summary, the study provided the mean importance ratings and identified the ten main location attributes important to manufacturing firms as a whole and across nationality. In the aggregate, the results may indicate seeming inconsistencies. For example, the entire manufacturing sample rated capital concerns as relatively unimportant, while rating financial assistance and tax breaks as important (also found by Hartman 1984, Boskin and Gale 1987). However, when analyzed by nationality, it becomes much more consistent that firms (Japanese firms for example) which do not consider capital concerns as important, also do not consider financial assistance or tax breaks as consequential. It should be noted that although capital concerns and financial assistance/tax break considerations may be related, they are not necessarily the same. Capital concerns may be a larger construct which may or may not include state financial assistance, but includes other considerations such as the availability of investment capital or willing investors.

Similar to work done by McConnell (1980), the findings generally showed that the location decisions of foreign manufacturing investors in the U.S. were significantly more influenced by community environment, logistics, and trade concerns when compared to domestic investors. The U.S. firms on the other hand placed more importance on financial considerations in terms of taxes, capital and incentives (as found by Bartik 1985, Newman and Sullivan 1988). However, the results of the study indicated a possible change in what is different between U.S. and Non-U.S. firms when compared to previous similar research. For example, while past research (Glickman et al. 1989) found that "Quality of Life" is of utmost importance to domestic operations, this study showed that it has become significantly more important to foreign companies. Other attributes shown to be important by past studies such as "Access to Markets" or "Nearness to US Markets" (Arpan and Ricks 1975, Daniels 1970, Glickman et al. 1989, Tong 1979), "Market Size" (Schollhammer 1974), "Land, Labor and Construction Costs" (Glickman et al. 1989, Little 1978, Schollhammer 1974, Tong 1979) have also seemed to significantly decline in importance to foreign firms. However, there were areas that intuitively remained more influential to foreign companies vis-a-vis domestic firms, such as transportation and port availability (Little 1978, Tong 1979).

The Japanese in particular, showed a higher regard for community/labor attitudes and environment than found in previous studies (e.g. Tong 1979). It seemed that their concern over proximities to markets within the U.S., site and expansion space availability, transportation and utilities/land costs have declined over time since Tong's (1979) findings. Access to U.S. markets may not be as important as before and their focus may have shifted from a low cost to a differentiation emphasis. In addition, this could possibly be indicative of the controversial Japanese firm strategy of trying to locate its various plants across various states for political clout reasons. A decline in cost and expansion concerns could be indicative of the increased strength of the Yen and the availability of suitable plant sites with expansion capabilities. The high regard for "Nearness to Third Country Operations" tends to support the observation that Japanese firms strategically establish FDI in the U.S. not only to penetrate the U.S. market, but others (such as Europe) as well. It should be noted that both the Japanese and German companies distinctly focused more on employee training and less on financial concerns such as taxes, tax breaks, capital, and financial incentives. This supports the notion of their long term orientation characteristic as concluded by Foster (1976).

Lastly, this study's results showed that the German firms were the most concerned about unions, instead of the Japanese, and the least concerned about the availability of unskilled labor. Differences between Japanese and German FDI were also identified by Friedman, Gerlowski, and Silberman (1992) and by Chernotsky (1983). Location attributes cited by Tong (1979) as important to German companies have all declined in their level of importance. For example, German respondents were now more interested in "Labor Turnover and Productivity" rather than "Nearness to Markets Within the U.S." or land, construction and transportation costs. However, German concern over "Attitudes of Local Government" has remained important and consistent with other earlier studies (Schollhammer 1974, Tong 1979). In general, the overall results of this study provided evidence towards a shift or change in what and how much location factors are important to FDIUS. These findings may be potentially caused by influences such as changes in the objectives and strategies of firms, their investment experience gained over time, or the external environment. These possible relationships should be examined by future study.

Implications for both foreign and domestic firms can be derived from the study. For foreign firm management considering location in the United States, these results confirm that useful information and attractive incentives can be potentially provided by informed development agencies and officials. With the different location priorities among investors, it may prove more productive for foreign managers to emphasize their preferences at the very beginning of the site search as opposed to the negotiation stage. The relative higher preference for financial incentives by domestic companies can be indicative of their short term orientation, and a need for a more long term site selection approach involving employee training subsidies.

These results should provide economic development officials with a better understanding of foreign investors and their location considerations which may differ from their domestic counterparts. Communities need to tailor their marketing, bargaining and negotiation efforts to accommodate these differences. An awareness of foreign manufacturer location determinants, and how it may differ from domestic firms, should provide development officials with the flexibility and ability to efficiently utilize incentive alternatives. It is also more effective for communities to initially offer the incentives that are most important to a particular investor, rather than risk the additional cost of unnecessary subsidies. For foreign investors, communities may need to emphasize export-related facilities and other infrastructure development. More importantly, employee training incentives are very crucial to foreign site selection.

While this paper may provide a further understanding of the determinants of the location decisions of firms in the United States, its limitations emphasize the need for further research. Other than nationality, the effect of other firm-specific factors on location decision needs to be considered. For example, the possibility and magnitude of industry effects should be further investigated. Industry factors may help explain the differences in the relative importance of the location factors examined. Additional research should focus on the nature of the location decision process itself, and how this could be influenced by nationality and management styles. Finally, with characteristics different from manufacturing firms, companies in the fast-growing service sector should not be overlooked.

Appendix: Location Factors and Corresponding Attributes
Location Factor Factor
Location Attribute Loading

FTA1: "Local and Labor Attitudes"

Level of Unionization 0.65356
Labor Turnover Rate 0.80642
Attitudes of Local Government Officials 0.55206
Attitudes of Local Citizens 0.59255
Local Labor Laws 0.75505
Local Labor Attitudes 0.78723
Local Salary and Wage Levels 0.70663
Availability of Unskilled Labor 0.59315
Unemployment Insurance Rates 0.56142
Labor Productivity 0.70762
Availability of Utilities 0.56142
Cost of Utilities 0.56836

FTA2: "Community Environment"

Size of Community 0.58193
Education Facilities 0.76049
Housing Facilities 0.79032
Police and Fire Protection 0.69683
Climate 0.59851
Suitability to Expatriates and Families 0.71125
Facilities for Children 0.85578
Social Environment for Spouses 0.82817
Hotel Accommodations 0.64470
Crime Level 0.67015

FTA3: "Incentives"

State Financial Assistance 0.80915
Local Financial Assistance 0.80642
State Tax Breaks 0.84685
Local Tax Breaks 0.83170
Business Assistance 0.63490
Employee Training 0.57767
Infrastructure Development 0.58524
Free Trade or Enterprise Zones 0.56780
Site Improvements 0.61065
Site Selection Assistance 0.55838
Land Grants 0.58703

FTA4: "Land and Transportation Services"

Availability of Suitable Plant Sites 0.56825
Cost of Suitable Land 0.72758
Space for Expansion 0.63239
Construction Costs 0.58629
Availability of Transportation Services 0.58638
Transportation Costs 0.51788

FTA5: "International Concerns"

Availability of Seaports 0.58100
Trade Facilities 0.71832
Nearness to Third Country Operations 0.81688
Nearness to Home Operations 0.59604
Nearness to Export Markets Outside U.S. 0.81693

FTA6: "Synergy Logistics"

Nearness to Other Parent-owned Plants 0.69420
Nearness to Partner-owned Plants 0.74432
Nearness to Plants of Same Nationality 0.71938
Nearness to Companies in Same Industry 0.60999

FTA7: "Input Logistics"

Nearness to Suppliers 0.80850
Nearness to Raw Materials/Input Sources 0.80071

FTA8: "Capital Concerns"

Cost of Capital 0.89000
Availability of Capital 0.89216

FTA9: "Market Logistics"

Nearness to Major Buyers 0.78293
Nearness to End Consumers 0.81478

FTA10: "Skilled Human Resource Availability"

Availability of Managerial Personnel 0.58032
Availability of Skilled and Technical Labor 0.60887
Top Seven Factors Percent of Cumulative
 Variance Percentage

Total Manufacturing Firm Sample (n = 305)

FTA1: "Local and Labor Attitudes" 39.2 39.2
FTA2: "Community Environment" 6.2 45.4
FTA3: "Incentives" 5.5 50.9
FTA4: "Land and Transportation Services" 4.9 55.8
FTA5: "International Concerns" 3.3 59.1
FTA6: "Synergy Logistics" 3.1 62.1
FTA7: "Input Logistics" 2.7 64.8


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Francis M. Ulgado, Assistant Professor, School of Management, The Ivan Allen College of The Georgia Institute of Technology, Atlanta, GA, U.S.A.
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Date:Jan 1, 1996
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