Why Do Multinational Enterprises Invest Less?

U.S. Multinational enterprises (MNEs) are dominant producers in the economy, yet they invest considerably less relative to their operating scales and exhibit much lower Tobin's q than domestic firms. Counterintuitively, investment and Tobin's q plunge despite concurrent productivity increase when firms multinationalize. This paper explains why MNEs invest less despite increasing productivity as a consequence of the multinationalization option exercise. Average U.S. public firms hold multinational investment opportunities as sizeable as 40% of assets at the time of multinationalization. We rationalize the stylized facts in a minimally extended investment model that generates multinationalizations selected by more productive firms with a sizable domestic-MNE investment premium as in the data. Multinationalization is a common, large, and permanent corporate investment mechanism, and multinational status places one of the most informative observables for the optimal investment policy. Thus, investment-q relation ignoring commonly priced options such as multinationalization mistakenly suggests secular underinvestment for the most productive firms