Are US Multinationals Making Rational Offshoring Decisions? A Gravity Model Approach

This paper constructs five indicators that a multinational firm must take into account when deciding the location of its offshore units. These indicators are: human capital; skilled labour cost; quality of infrastructure; business environment; and market size. The indicators are based on over 100 different underlying variables. The paper then ranks 51 economies of the world from 'most attractive country' to 'least attractive country' on the basis of these five indicators and studies the responsiveness of US foreign direct investment to these fundamentals in a gravity model framework. Our random effects estimations show that English language capabilities, market size, telecommunication infrastructure and business environment are the factors that are most important in shaping the location decisions of US multinationals. Distance is also seen to play an important role, indicating a preference for a 24/7 staffing model among US multinationals