U.S.A. FOREIGN DIRECT INVESTMENT ABROAD: THE CHEAP LABOR MOTIVE EXAMINED

In light of the recent surge in foreign direct investments (FDI) and renewed interests in the cheap labor motive, we empirically estimate the significance of relative wages as a determinant of FDI by the U.S. automobile industry in Germany, Spain, Canada, Australia, Brazil, Mexico, and the UK. Using data from 1980-1993 and multiple regression analysis the results are supportive of the cheap-labor theory of FDI in Mexico and Spain. Additional significant results include the market size theory in Germany, Spain, the U.K. and Australia and the cost of capital theory in Mexico and Canada. This approach is a significant improvement in the methodology employed in earlier studies by focusing on an industry with affiliates in different countries having significant variation in wage structure and pattern of economic growth.