Does a firm with higher Tobin's q prefer foreign direct investment to foreign outsourcing?

Naoto Jinji, Xingyuan Zhang, Shoji Haruna

Research output: Contribution to journalArticle

Abstract

In this study, we investigate whether firms’ choices of offshoring modes vary according to their characteristics that are reflected in the value of Tobin's q. When a firm chooses its offshoring mode from foreign outsourcing (FO) and foreign direct investment (FDI), a model developed by Chen, Horstmann, and Markusen (2012, Canadian Journal of Economics) predicts that Tobin's q is negatively associated with the share of FO in total offshoring activities. Using detailed Japanese firm-level data, we find that Tobin's q is negatively and significantly correlated with the share of Japanese firms’ engagement in FO in the sum of FO and FDI. With regard to our empirical methodology, we employ fractional regression models, because our dependent variable (i.e., the share of FO) is bounded between zero and one. We also address the issue of endogeneity by using a simple two-step method to control endogenous explanatory variables in the fractional regression models. We show that the above finding is robust.

Original languageEnglish
Article number101044
JournalNorth American Journal of Economics and Finance
Volume50
DOIs
Publication statusPublished - Nov 2019

Fingerprint

Outsourcing
Tobin's Q
Foreign direct investment
Offshoring
Regression model
Japanese firms
Endogeneity
Economics
Firm-level data
Methodology

Keywords

  • Foreign direct investment
  • Foreign outsourcing
  • Fractional regression model
  • Tobin's q

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Does a firm with higher Tobin's q prefer foreign direct investment to foreign outsourcing? / Jinji, Naoto; Zhang, Xingyuan; Haruna, Shoji.

In: North American Journal of Economics and Finance, Vol. 50, 101044, 11.2019.

Research output: Contribution to journalArticle

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