Impact of Supply Chain Network Structure on FDI: Theory and evidence

This study investigates how the structure of a supply chain network in the domestic market influences the foreign direct investment (FDI) decisions of firms embedded in the network. We first describe the binary choice of firms on whether to invest through a coordination game of a fixed network with incomplete information of the firms’ profits, and we show that the unique equilibrium of the game is represented by the Katz-Bonacich centrality measure, which captures both direct and indirect effects of the network. Then, we also conduct empirical tests to verify our theoretical hypothesis with large disaggregated data of Japanese firms and confirm that the Katz-Bonacich centrality of each firm has a significantly positive effect on its FDI even when sector-specific fixed effects and other attributes are controlled for, as our theory predicted.