The Distribution of Fixed Capital in the Multinational Firm

Based on industry-level data for majority-owned U.S. foreign affiliates in 49 countries, this paper identifies the determinants of the cross-country distribution of fixed capital within multinational companies. Controlling for market size and trade openness, it is shown that U.S.-owned capital stocks are high in countries with a history of high profitability and low earnings variability. Similarly, the formation of fixed capital is encouraged in host countries with low variable costs, low political risks, and open trade regimes. At the same time, capital expenditures in the late 1990s appear to be insensitive to contemporaneous changes in risk and market shares, underlining investors' sluggish response to the changing characteristics of their host markets. These findings underline the importance of risk in deterring fixed capital expenditures in – and by implication capital flows to – developing countries.