The effects of competition policy,regulatory quality and trust on inward FDI in host countries

This article develops a comparative institutionalist framework to investigate how pro-enforcement reforms leading to a change in competition policy regimes attracts FDI in host countries, and how this relationship is moderated by the interplay between key formal and informal institutions. We revisit the FDI theory by integrating insights from economics of competition policy and the most recent debate on how institutions matter to international business. We contend that the effectiveness of competition policy enforcement is a crucial factor in attracting FDI, but only in host countries characterized by institutional configurations where the lack of trust is concomitant with a high-quality regulatory institutional environment. Our analysis on a sample of 63 countries followed in the 1980–2017 period supports our hypotheses. This paper contributes to a deeper understanding on the competition policy–FDI relationship at national level and has implications for policy makers.     

Pro-market institutions and outward FDI of emerging market firms: An institutional arbitrage logic

We offer new theory and evidence regarding the effects of pro-market institutions on outward foreign direct investment (FDI) of emerging market firms (EMFs). Drawing on the logic of institutional arbitrage, we integrate the escapism and exploitation mechanisms of EMF internationalization into a unified theoretical context. We propose an inverted U-shaped relationship between host market-supporting institutions (MSI) and the investment scale of an EMF’s FDI project in the country, showing an escape-driven upward slope for low-to-medium MSI levels and an exploitation-driven downward slope for medium-to-high MSI levels. We supplement this main argument with two boundary conditions: the alleviating effect of home market liberalization (HML) and the strengthening effect of home government subsidies (HGS), demonstrating the coexistence and variation of pro- and anti- market institutions in an emerging market. Using information on 1,450 FDI projects conducted by 288 Chinese listed firms in 116 host countries, we obtain supportive evidence for the predicted relationships between the three institutional forces. This study enriches the literatures on institutional arbitrage and pro-market institutions with evidence from EMFs.     

Institutional Determinants of Foreign Direct Investment

In this paper, we contribute to the literature on the determinants of foreign direct investment in developing countries and re‐evaluate the role of the quality of institutions on FDI independently of the general level of development. We implement cross‐section estimations based on a newly available database with unprecedented detail on institutions for a set of 52 countries, as well as panel data estimations based on Fraser Institute's data. Furthermore, we control for the correlation between institutions and GDP per capita and for endogeneity of institutions. Finally, we evaluate whether the similarity of institutions between the host and the origin country raises bilateral FDI. We find that a wide range of institutions, including bureaucracy, corruption, but also information, banking sector and legal institutions, do matter for inward FDI independently of GDP per capita. Interestingly, weak capital concentration and strong employment protection tend to reduce inward FDI. Institutional proximity between the origin and the host country also matters, but we find little impact of institutions in the origin country. These results are encouraging in the sense that efforts towards raising the quality of institutions and making them converge towards those of source countries may help developing countries to receive more FDI, independently of the indirect impact of higher GDP per capita. The orders of magnitude found in the paper are large, meaning that moving from a low level to a high level of institutional quality could have as much impact as suddenly becoming a neighbour of a source country.     

Foreign Direct Investment in Africa: The Role of Natural Resources,Market Size,Government Policy,Institutions and Political Instability

Data from several investor surveys suggest that macroeconomic instability, investment restrictions, corruption and political instability have a negative impact on foreign direct investment (FDI) to Africa. However, the relationship between FDI and these country characteristics has not been studied. This paper uses panel data for 22 countries over the period 1984–2000 to examine the impact of natural resources, market size, government policies, political instability and the quality of the host country's institutions on FDI. It also analyses the importance of natural resources and market size vis‐à‐vis government policy and the host country's institutions in directing FDI flows. The main result is that natural resources and large markets promote FDI. However, lower inflation, good infrastructure, an educated population, openness to FDI, less corruption, political stability and a reliable legal system have a similar effect. A benchmark specification shows that a decline in the corruption from the level of Nigeria to that of South Africa has the same positive effect on FDI as increasing the share of fuels and minerals in total exports by about 35 per cent. These results suggest that countries that are small or lack natural resources can attract FDI by improving their institutions and policy environment.     

Home country institutions,social value orientation,and the internationalization of ventures

We examined how home country formal institutions and the venture’s value orientation influenced the venture’s likelihood of internationalization based on a data set that was adapted from the Global Entrepreneurship Monitor (GEM) data in the year 2009, covering 7668 individual ventures in 25 countries. Better-developed home country formal institutions are found to have a supportive impact on the venture’s likelihood of internationalization. The supportive impact is also found to be weaker for socially oriented ventures than for profit-oriented ventures. The venture’s social value orientation negatively moderates the home country formal institutions–likelihood of internationalization relationship. The negative moderating effects can be explained as follows: Socially oriented ventures in the better-developed home country institutional environment are less likely to develop coping skills against uncertain and risky institutional environments, which are common in their host countries. Besides the theoretical contributions, this paper also highlights the implications for both business researchers and policy makers.     

Modes of Foreign Direct Investment and Patterns of Trade: An Alternative Empirical Approach

Modes of FDI can be clarified by analysing the changing patterns of trade among host, home and third countries. However, most empirical experiments of foreign direct investment (FDI) determinants have been confined to general characteristics of host countries and multinational enterprises' outward investment activities. This may not clearly characterise the specific characteristics of inward FDI in regard to the host country. Thus, we introduce an alternative approach to clarify modes of FDI by investigating the link between patterns of trade and inward FDI. To empirically test whether our approach is applicable, we choose China during the period 1998–2007. We construct a modified gravity equation of bilateral trade while considering spatially lagged interdependence between host, home and third countries. The problem of endogeneity is controlled by applying the system generalised method of moments (GMM) estimation technique. Our findings are consistent with results in existing studies on modes of outward FDI to China and prove that our approach in dealing with the link between patterns of trade and inward FDI has wide applicability to all modes of FDI. We discover there is strong evidence for statistically significant complementarity between bilateral trade and inward FDI within the aggregate trade data. As we decompose the aggregate trade data into final and intermediate goods, we find the motivation concerning export‐platform and complex vertical FDI is very significant. In addition, as we separate the bilateral partners into developing partners and developed partners, we find both bilateral and multilateral linkages are much stronger with developing partners.     

A comparison of FDI determinants in China and India

This study explores foreign direct investment (FDI) determinants in China and India and fills the gap in the literature by providing a comprehensive empirical comparison analysis. Two panel data sets and two statistical models are employed to identify the determinants of FDI inflows from home countries worldwide to the two host countries by considering both home and host countries' characteristics. The empirical results show some interesting similarities and differences between the two countries. Market growth, imports, labor costs, and country political risk/policy liberalization are the determinants for both countries. However, exports, market size, and borrowing costs are important to China's FDI, while geographical and cultural distance factors are important to India's FDI. © 2009 Wiley Periodicals, Inc.     

Religion and foreign direct investment

This study examines the effect of religion on foreign direct investment (FDI). Using a large sample of directional FDI flows and religious data between 1985 and 2019, we calculate the religious distance between home and host countries and find that FDI flows are smaller for country pairs with greater religious distance. This finding remains intact after a host of variables affecting FDI are controlled. Moreover, the negative effect of religious differences is less pronounced if the host country has higher religious diversity or both countries have a bilateral investment treaty (BIT) in force. Finally, we construct a country-level measure for religiosity and find an asymmetric effect of religiosity on FDI flows. Overall, our study suggests that both religious differences and the level of religiosity play important roles in explaining international FDI flows. (JEL F21, F41, Z12)     

Does foreign direct investment promote institutional development in Africa?

Foreign direct investment (FDI) inflows into Africa have increased since the turn of the millennium, mainly due to FDI growth into African countries by multinational enterprises (MNEs) from developing economies. While African governments view this growth as a positive development for the continent, many governments in the West have raised concerns regarding the institutional impact of investments from developing economies. This paper examines the impact of FDI flows on institutional quality in African countries by distinguishing investments from developed versus developing economies. Previous empirical studies have found a significant relationship between FDI flows and institutional quality in African countries but regard the relationship as MNEs rewarding African countries for adopting institutional reforms. However, little attention has been paid to the reverse causality, i.e. that FDI can cause an institutional change in African countries. Using bilateral greenfield FDI flows between 56 countries during 2003?2015, we find no significant FDI effect from developed and developing economies on institutional quality in host countries. However, aggregate FDI flows from developed and developing economies have a significant positive effect on host country institutional quality but differ concerning the impact's timing. In contrast, we find no significant effect of FDI flows from China on host country institutional quality. Our results are robust to alternative measures of institutional quality.     

基于中国FDI的空间计量分析

八十年代以来,随着国际直接投资(FDI)的迅速增长,很多学者便开始将研究的目光放在了国际直接投资上。但总体上说来大部分关于国际直接投资的实证文献主要是基于投资国和受资国的双边联系,而对第三方在这种关系中的作用和扮演的角色,没有进行相应的探讨。本文借用基于面板数据的空间计量模型方法,从地区之间的空间关系的视角考察了中国地区之间在国际直接投资上互相影响的模式,并分析了形成这种空间作用模式的原因。     

Foreign Direct Investment and Economic Growth in SSA: The Role of Institutions

This article examines the relationship among foreign direct investment (FDI), institutions and economic growth in sub‐Saharan Africa in different country environs. We employ a two‐step generalized methods of moments estimator with Weidmeijer corrected standard errors and orthogonal deviations to examine the empirical relations. In the full sample, we do not find evidence that FDI promotes growth. We also do not find a significant relationship between institutions and economic growth. Finally, we do not find convincing evidence that institutions alter favorably the effect of FDI on economic growth. In the subsample that excludes countries with developed financial markets, again we do not find a significant relation between FDI and economic growth. However, we find evidence suggesting that institutions play a direct role in spurring economic growth. Further, the quality of institutions seems to alter favorably the relationship between FDI and economic growth. Finally, in the sample that excludes countries with abundant natural resources, we find a direct and positive relationship between FDI and economic growth. We also find a direct relationship between institutions and economic growth. The growth‐enhancing effects of FDI, however, seem to reduce as the quality of institutions improves. The major implication from our study is that countries should take into consideration their own realities when they fashion policies to benefit from FDI in terms of achieving better growth outcomes. © 2016 Wiley Periodicals, Inc.     

How Does FDI Affect Productivity at Home?: Evidence from a Plant-Level Analysis

This study investigates the effect of foreign direct investments (FDI) on home productivity using plant-level data rather than firm-level data. Our results are consistent with the theoretical predictions. Horizontal FDI (HFDI) does not have a significantly positive effect on home productivity in plants that have the same activities abroad. In contrast, vertical FDI (VFDI) significantly enhances productivity in plants with an input–output relationship with activities relocated abroad. Furthermore, focusing on FDI in East Asia, the productivity improvements at home through VFDI are even greater, which might be caused by significant differences in factor prices between Japan and host countries.     

The characteristics of intellectual property rights regimes: How formal and informal institutions affect outward FDI location

This study examines the institutional arrangements that define the characteristics of national legal systems that are used to protect intellectual property (IP) assets embedded in outward FDI. The focus of the study is on how the institutional underpinnings of IPR regimes affect the costs and risk of using legal arenas to enable effective use of IP assets. Following a property rights approach it is postulated that formal and informal institutional arrangements influence how IP regimes affect the transaction costs and risk associated with converting ownership rights over IP into economic rights. Informal institutions are considered to affect the behaviour of agents involved in enforcing legal rights. This behaviour influences how IP law is implemented in legal arenas and thereby impacts on the efficacy of IPR regimes to help secure economic rights from the use of IP assets. Using data on outward FDI from the USA to 42 host countries the results find that the strength of informal institutions connected to the enforcement of IP in a country directly affects outcomes and positively moderates the effect of formal legal aspects of IP law on FDI flows. The results highlight the importance of informal institutional aspects connected to the behaviour of enforcement agents when using national legal systems to protect IP rights in cross-frontier transactions.     

The impact of regulations on the FDI-growth nexus within the institution-based view: A nonlinear specification with varying coefficients

The impact of Multinational Enterprise (MNE) activities on economic development and poverty reduction constitute a specific field of study within International Business (IB) scholarship during the last decade. Extending the institution-based view that “institutions matter”, we shift the focus of interest on the effect of institutions in the FDI-growth nexus which, surprisingly, have been overlooked by respective literature. A profound understanding of the FDI impact on economic growth cannot neglect institutions that shape the macro environment where MNEs operate. Within this rationale, this paper examines the effect of FDI on growth under different formal institutions placing emphasis to credit and labour market regulatory systems in both advanced and developing countries. Most empirical studies stemming mainly from the economics perspective, assume that the FDI growth effect is linear and incorporate specific functional forms for their regression relationships. We rely on more advanced econometric methods that allow for the regression coefficients to vary as smooth functions of other variables, allowing for more plausible empirical results. Our findings strongly support our suggestion that the host institutional context shape the strategies, structures and competitiveness of MNEs’ activities which they then affect differently economic growth. We thus provide useful insights regarding the long-lasting debate on the FDI-growth nexus.     

The limits of firm-level globalization: Revisiting the FSA/CSA matrix

Multinational enterprises (MNEs) engaging in foreign direct investment (FDI) need advantages allowing them to offset the liability of foreignness in host countries. This liability of foreignness gives rise to additional operational costs related to economic, institutional, and cultural differences between home and host countries. MNEs therefore need to own or control firm-specific advantages (FSAs) that, along with country-specific advantages (CSAs) and internalization advantages, affect international business transactions. In this paper, we revise Rugman’s classic FSA/CSA matrix to better reflect how firms bundle their assets with CSAs. We further contribute to the prior debate on the linkages between the global factory paradigm and internalization theory by empirically evaluating the validity of a key proposition associated with the global factory, namely that FDI becomes relatively less important as a building block of the modern MNE. We do so using data on FDI and cross-border mergers and acquisitions, a major component of FDI.     

The Impact of FDI Inflow on Domestic Firms’ Uptake of CSR Activities: The Moderating Effects of Host Institutions

This study examines whether foreign direct investment (FDI) inflow helps or hinders local firms’ uptake of corporate social responsibility (CSR) activities in a developing host country. The study further examines the interaction effect of host institutions on the relationship between FDI inflow and local firms’ uptake of CSR activities. Results of hierarchical regression analysis of data from a sample of 227 local firms in Ghana, reveal that local firms’ uptake of CSR improves significantly with an increasing inflow of FDI through knowledge transfer. Host institutions are also found to influence the transfer of CSR activities from foreign firms to local firms. However, when the quality of institutions is very high, the impact of FDI on local firms’ CSR activities diminishes. Research and practical implications of these findings are discussed. © 2015 Wiley Periodicals, Inc.     

The impact of regulatory quality on intra-foreign direct investment flows in the ASEAN markets

Using a panel data set containing information on FDI flows from home to host countries, this paper examines the impact of changes in the quality of government regulatory effectiveness and governance practices upon the direction of outward FDI flows between five ASEAN economies of Indonesia, Malaysia, Philippines, Singapore, and Thailand. The results show that a deterioration in the effectiveness and enforcement of investment regulations (such as price controls and excessive regulation in foreign trade and business development) have an adverse effect upon intra-ASEAN FDI, and are significant factors in explaining the recent downward trend in ASEAN FDI flows. These results are robust to changes in a number of controlling variables for various economic conditions that the extant FDI literature consider. Also, these results have several significant implications for future policy makers in recommending means to revitalize intra-ASEAN investment.     

Institutional,cultural and industry related determinants of ownership choices in emerging market FDI acquisitions

In this study, we tackle a relatively un-researched question: What explains partial FDI acquisitions? The choice between full, majority, and minority ownership is explained on the basis of three locational factors – the differences, or “distances,” between the countries of the acquirer and target firm – operationalized in terms of (i) institutions, (ii) culture, and (iii) sectoral relatedness. The sample comprises 1389 acquisitions in India and China by acquirers from 33 nations over an 11-year period. We find that the likelihood of minority acquisition over majority or full becomes higher when acquisitions involve low institutional distance or high uncertainty avoidance distance. However, the likelihood of minority acquisition over full or majority becomes lower when acquisitions involve industry relatedness. The results add to our understanding of the advantages and disadvantages of partial versus full FDI acquisitions in emerging markets. This study adds to the nascent literature that uses country or location “distance” metrics to show how the multinational firm, being “multiple embedded” (Meyer et al., 2011), can take advantage of the dual location of home and host countries.     

FDI,Productivity and Financial Development

This paper examines the effect of foreign direct investment (FDI) on growth by focusing on the complementarities between FDI inflows and financial markets. In our earlier work, we found that FDI is beneficial for growth only if the host country has well‐developed financial institutions. In this paper, we investigate whether this effect operates through factor accumulation and/or improvements in total factor productivity (TFP). Factor accumulation – physical and human capital – does not seem to be the main channel through which countries benefit from FDI. Instead, we find that countries with well‐developed financial markets gain significantly from FDI via TFP improvements. These results are consistent with the recent findings in the growth literature that shows the important role of TFP over factors in explaining cross‐country income differences.     

The pecking order of cross-border investment

Is there a pecking order of cross-border investment in that countries become financially integrated through some types of investment rather than others? Using a novel database of bilateral capital stocks for all types of investment - FDI, portfolio equity securities, debt securities as well as loans - for a broad set of 77 countries, we show that such a pecking order indeed exists. The paper focuses on two key determinants of this pecking order: information frictions and the quality of host country institutions. Overall, we find that in particular FDI, and to some extent also loans, are substantially more sensitive to information frictions than investment in portfolio equity and debt securities. We also show that the share as well as the size of FDI that a country receive are largely insensitive to institutional factors in host countries, while portfolio investment is by far the most sensitive to the quality of institutions. This provides new evidence in favor of some hypotheses but contradicts others put forward in the literature on trade in financial assets.