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Institutional Distance and Foreign Direct Investment

Author

Listed:
  • Rafael Cezar

    (Banque de France - Gaz de France Direction de la Recherche, DIAL - Développement, institutions et analyses de long terme)

  • Octavio Escobar

    (School of Business - Adelphi University)

Abstract

This paper studies the link between Foreign Direct Investment (FDI) and institutional distance. Using a heterogeneous firms framework, we develop a theoretical model to explain how institutional distance influences FDI and it is shown that institutional distance reduces both the likelihood that a firm will invest in a foreign country and the volume of investment it will undertake. We test our model, using inward and outward FDI data on OECD countries. The empirical results confirm the theory and indicate that FDI activity declines with institutional distance. In addition, we find that firms from developed economies adapt more easily to institutional distance than firms from developing economies.

Suggested Citation

  • Rafael Cezar & Octavio Escobar, 2015. "Institutional Distance and Foreign Direct Investment," Post-Print hal-01270939, HAL.
    • Handle: RePEc:hal:journl:hal-01270939
    DOI: 10.1007/s10290-015-0227-8
    Note: View the original document on HAL open archive server: https://hal.science/hal-01270939
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    More about this item

    Keywords

    Foreign Direct Investment; institutions; heterogeneous firms; gravity model;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H80 - Public Economics - - Miscellaneous Issues - - - General
    • K20 - Law and Economics - - Regulation and Business Law - - - General

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