Estimating the Production Efficiency of US Foreign Direct Investment


Finance, University of Akron, Akron, OH, USA. E-mail:


This paper empirically estimates the efficiency of outward US foreign direct investment (FDI) within the framework of economies of scale, which is hypothesized as a main goal of ‘efficiency-seeking’ multinationals. By using data for the period 1982–2007 and a nonhomogeneous production, the estimates of efficiency indicate an improvement in efficiency from decreasing to increasing returns to scale. The increasing productivity of both capital and labor is a contributory factor. Evidence of increasing elasticity of factor substitution attests to management use of a flexible production technology that enables efficient resource allocation. The results lend support to the ‘efficiency-seeking’ hypothesis of FDI. Copyright © 2012 John Wiley & Sons, Ltd.