Nonlinearities and a Pecking Order in Cross-border Investment

We hypothesize that nonlinearities can arise in international investment factors because of a pecking order in barriers. When direct barriers are severe, improvements in governance factors such as rule of law and expropriation risk can increase investment. Only when severe barriers are ameliorated can factors such as firm-specific information, transaction costs and hedging motives become more important. Evidence from unconditional quantile regressions indicate that investment factors vary across the distribution and also provide support for a pecking order hypothesis. Specifically, while access to basic information is important everywhere, governance and familiarity matter where barriers are high, roles for information and hedging motives become more apparent where barriers are moderate, and where there are no barriers small improvements in governance have little effect on investment. Considering all of our results, support is broadest for roles for familiarity and (where barriers are severe) governance, also evident for information and hedging motives, and more limited for transaction costs. Our results can also help reconcile a number of findings in the literature by highlighting that datasets which focus on different points of the barriers (investment) distribution can naturally lead to different results. Going forward, as the literature focuses on specialized datasets and granularity / asset demand systems, analysis should incorporate nonlinearities inherent in cross-border barriers and investment.