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Original document was submitted as an honors thesis requirement. Copyright is held by the author.

Document Type

Thesis

Abstract

The purpose of this thesis is to determine US firms’ motivations for foreign direct investment and to explore to what extent US firms continue to invest into China and India. I first correlate the agricultural, industrial, and service sectors in the United States with those of China and India. I find that there is a positive relationship between the correlation of US sectors and the host country’s sectors and foreign direct investment into each sector. This supports the theory of Vernon’s product life cycle hypothesis, which explains that firms expand into lesser developed countries when their product becomes more sensitive to cost of production. I also find that there is a negative relationship between the correlation of the US and host country’s economies and FDI into each sector. This supports the cash flow diversification theory, which explains that if sectors in the United States and the host country have a low correlation, US firms will disburse more foreign direct investment into this sector in order to reduce cash flow volatility. I then examine the impact of investment profitability on continuing FDI. The results generally indicate that investment decisions are positively affected by the profitability of previous investments, as expected.