Market expansion versus cost reduction: a financial analysis of foreign direct investment advantages for multinational enterprises

By testing a large sample of US-based multinational enterprises (MNEs), we attempt to microscope the relations between FDI advantages and excess market value created thereby. Two most commonly pursued FDI advantages—market expansion and cost reduction—come under the analysis. We find that the overseas divisions of US-based MNEs have significant market expansion advantage over the domestic divisions, but do not have significant cost reduction advantage. The cross-sectional variation in excess market value of US-based MNEs finds an explanation in the market expansion advantage when firm equity risk is held constant, but it cannot be explained by the cross-sectional variation in the cost reduction advantage. Given the result of our study, we also deliberate on the relations of FDI advantages with the degree of international involvement by MNEs. # 2002 Elsevier Science B.V. All rights reserved. JEL classification: F21