From structural to transition effects: Institutional dynamism as a deterrent to long-term investments by MNEs |
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| Affiliation: | 1. University of Bremen, Faculty of Business Studies and Economics, Enrique-Schmidt-Straße 1, 28359 Bremen, Germany;2. Aalto University, School of Business, P.O. Box 21210, 00076 Espoo, Finland;1. International Business, Strategy and Entrepreneurship Department, Auckland University of Technology, 55 Wellesley Street East, Auckland Central, New Zealand;2. Auckland University of Technology, New Zealand;1. Middlesex University, The Burroughs, London, NW4 4BT, United Kingdom;2. University of Surrey, Stag Hill, Guildford, GU2 7XH, United Kingdom;1. Robert W. Plaster School of Business, Missouri Southern State University, USA;2. DeVille School of Business, Walsh University, 2020 East Maple, North Canton, OH 44720, USA;3. School of Management, University of Michigan-Flint, 303 E. Kearsley Street, Flint, MI 48502, USA;1. Asper School of Business, University of Manitoba, 181 Freedman Crescent, Winnipeg MB R3T 5V4, Canada;2. Faculty of Business Administration, Lakehead University, 955 Oliver Road, Thunder Bay, ON P7B 5E1, Canada |
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| Abstract: | The effect of institutional change on foreign direct investment is often conceptualized through the lens of an improving or deteriorating level of institutional quality that alters transaction costs. However, in the context of comprehensive government intervention in the past decades, this perspective ignores the potential uncertainties and costs associated with the process of institutional change. We propose that institutional change causes structural changes in transaction costs as well as accompanying transition effects due to uncertainty and learning costs. The extent of such transition effects is linked to the process characteristics of institutional change, e.g., institutional dynamism. In this paper, we examine the effects of institutional dynamism on foreign direct investment in long-term capital commitments and hypothesize a negative relationship between institutional dynamism and FDI, and a moderating effect of institutional dynamism on the relationship between institutional quality and FDI. Using investment data by US MNEs aggregated on the host country level, we find support for our hypotheses with some qualifications. We derive implications for the middle-income trap discussion as well as the ongoing fast-paced transition towards a sustainable global economy that is bound to shift attention from differences in the level of institutional quality towards differences in transition processes. |
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| Keywords: | Institutional Change Institutional Dynamism Institutional Instability Foreign Direct Investment Transition Effects |
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