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The effects of the governance environment on the choice of investment mode and the strategic implications

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  • Li, Shaomin
  • Filer, Larry

Abstract

Direct investment and indirect (portfolio) investment require different governance mechanisms for investor protection. The literature on the effect of the governance environment (such as the legal system) on investment, which had been relatively underdeveloped, has begun to draw more attention recently. Existing studies, however, have largely ignored the differences between the two modes of investment in terms of investor protection. Their finding that a poor governance environment deters foreign direct investment is mis-specified and fails to explain why countries with a poor governance environment attract relatively large amount of direct investment as opposed to portfolio investment. We introduce a framework that measures the level of rule-based governance environment in a capital receiving economy, with an especial attention to the information and enforcement mechanisms for investor protection facilitated by different governance environments. We argue that in countries with a weak rule-based governance environment, investors prefer direct investment to indirect (portfolio) investment, because the former can be better protected by private means. Our empirical test strongly supports our hypotheses. Strategic implications for investors are drawn in conclusion.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of World Business.

Volume (Year): 42 (2007)
Issue (Month): 1 (March)
Pages: 80-98

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Handle: RePEc:eee:worbus:v:42:y:2007:i:1:p:80-98

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Related research

Keywords: Governance environment Direct investment Indirect (portfolio) investment Public ordering Private ordering Rule-based Relation-based;

References

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Citations

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Cited by:
  1. Wu, Jun & Li, Shaomin & Samsell, Darryl, 2012. "Why some countries trade more, some trade less, some trade almost nothing: The effect of the governance environment on trade flows," International Business Review, Elsevier, vol. 21(2), pages 225-238.
  2. Kemp-Benedict, Eric, 2012. "The national bioenergy investment model: Technical documentation," MPRA Paper 37835, University Library of Munich, Germany.
  3. Shaomin Li & Kiran Karande & Dongsheng Zhou, 2009. "The Effect of the Governance Environment on Marketing Channel Behaviors: The Diamond Industries in the U.S., China, and Hong Kong," Journal of Business Ethics, Springer, vol. 88(3), pages 453-471, October.
  4. Liu, Chunyan & Uchida, Konari & Yang, Yufeng, 2014. "Controlling shareholder, split-share structure reform and cash dividend payments in China," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 339-357.
  5. Jing Yang & Frank Tipton & Jiatao Li, 2011. "A review of foreign business management in China," Asia Pacific Journal of Management, Springer, vol. 28(3), pages 627-659, September.
  6. White, George O. & Hemphill, Thomas A. & Joplin, Janice R.W. & Marsh, Laurence A., 2014. "Wholly owned foreign subsidiary relation-based strategies in volatile environments," International Business Review, Elsevier, vol. 23(1), pages 303-312.
  7. Jihong Liu & Yaping Wang & Liansheng Wu, 2011. "The Effect of Guanxi on Audit Quality in China," Journal of Business Ethics, Springer, vol. 103(4), pages 621-638, November.
  8. Bucheli, Marcelo, 2007. "The Politics of Vertical Integration in Extractive Industries: Business History and Political Economy," Working Papers 07-0112, University of Illinois at Urbana-Champaign, College of Business.
  9. Yang, Deli & Sonmez, Mahmut, 2013. "Integration and divergence of patent systems across national and international institutions," Journal of World Business, Elsevier, vol. 48(4), pages 527-538.
  10. Nasha Ananchotikul, 2008. "Does Foreign Direct Investment Really Improve Corporate Governance? Evidence from Thailand," Working Papers 2008-09, Economic Research Department, Bank of Thailand.
  11. White, George O. & Hadjimarcou, John & Fainshmidt, Stav & Posthuma, Richard A., 2013. "MNE home country cultural norms and conflict strategy fit in transnational business contract disputes," International Business Review, Elsevier, vol. 22(3), pages 554-567.
  12. repec:asi:ijoass:2013:p:2114-2133 is not listed on IDEAS

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