Firm Productivity and Foreign Direct Investment in the Services Sector : Non-parametric Test of Pecking Order Hypothesis

Using comprehensive Japanese data on service firms, this study examines the so-called pecking order hypothesis that more productive firms invest in a larger number of destination markets. The use of data on services firms enables us to test the hypothesis more rigorously because services firms that produce nontradable services cannot conduct foreign direct investment (FDI) by exporting to a third country. To examine the hypothesis, this study compares the overall distribution of productivity by the number of FDI destinations, using the nonparametric Kolmogorov-Smirnov (KS) test. The results are consistent with the hypothesis and show that more productive services firms tend to have their foreign subsidiaries in a larger number of foreign markets.