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Institutional quality, asset specificity, and foreign direct investment

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  • Tan, Man
  • Yang, Dengyu
  • Yang, Qijing

Abstract

This article demonstrates that MNC's foreign direct investment decision is linked with institutional quality and hinges on the asset-specificity intensity of FDI. Using a comprehensive global FDI database between 2003 and 2019, our results show that MNCs tend to engage in FDI of high asset-specificity in countries with superior institutional quality, while they launch FDI of low asset-specificity in countries with inferior institutional quality. Moreover, when engaging in FDI of high asset-specificity, MNCs take property rights institutions more seriously, and prefer the sole proprietorship model to the joint venture model there.

Suggested Citation

  • Tan, Man & Yang, Dengyu & Yang, Qijing, 2023. "Institutional quality, asset specificity, and foreign direct investment," Journal of International Money and Finance, Elsevier, vol. 134(C).
    • Handle: RePEc:eee:jimfin:v:134:y:2023:i:c:s0261560623000463
    DOI: 10.1016/j.jimonfin.2023.102845
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    More about this item

    Keywords

    FDI; Location choice; Ownership strategy; Institutional quality; Asset specificity;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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