The effects of the governance environment on the choice of investment mode and the strategic implications
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 42 (2007)
Issue (Month): 1 (March)
|Contact details of provider:|| Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/620401/description#description|
|Order Information:|| Postal: http://www.elsevier.com/wps/find/journaldescription.cws_home/620401/bibliographic|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Steven Globerman & Daniel Shapiro, 2004.
"Governance Infrastructure and U.S. Foreign Direct Investment,"
- Steven Globerman & Daniel Shapiro, 2003. "Governance infrastructure and US foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 34(1), pages 19-39, January.
- La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998.
"Law and Finance,"
3451310, Harvard University Department of Economics.
- Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," Harvard Institute of Economic Research Working Papers 1768, Harvard - Institute of Economic Research.
- Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
- Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
- Paul R. Milgrom & Douglass C. North & Barry R. Weingast, 1990. "The Role Of Institutions In The Revival Of Trade: The Law Merchant, Private Judges, And The Champagne Fairs," Economics and Politics, Wiley Blackwell, vol. 2(1), pages 1-23, 03.
- Randall Peerenboom, 2002. "Social networks, rule of law and economic growth in China: The elusive pursuit of the right combination of private and public ordering," Global Economic Review, Taylor & Francis Journals, vol. 31(2), pages 1-19.
- Mohsin Habib & Leon Zurawicki, 2002. "Corruption and Foreign Direct Investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 33(2), pages 291-307, June.
- David W Loree & Stephen E Guisinger, 1995. "Policy and Non-Policy Determinants of U.S. Equity Foreign Direct Investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 26(2), pages 281-299, June.
- Henisz, Witold J, 2000. "The Institutional Environment for Multinational Investment," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 334-64, October.
- Kirt C Butler & Domingo Castelo Joaquin, 1998. "A note on political risk and the required return on foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 29(3), pages 599-607, September.
- Nada Mora & Ratna Sahay & Jeronimo Zettelmeyer & Pietro Garibaldi, 2002.
"What Moves Capital to Transition Economies?,"
IMF Working Papers
02/64, International Monetary Fund.
- Martin, Roderick, 1999. "Transforming Management in Central and Eastern Europe," OUP Catalogue, Oxford University Press, number 9780198775683, December.
- Albuquerque, Rui, 2003.
"The composition of international capital flows: risk sharing through foreign direct investment,"
Journal of International Economics,
Elsevier, vol. 61(2), pages 353-383, December.
- Rui Albuquerque, 2004. "The Composition of International Capital Flows: Risk Sharing Through Foreign Direct Investment," International Finance 0405004, EconWPA.
- Michael D. Intriligator, 1994. "Privatisation in Russia Has Led to Criminalisation," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 27(2), pages 4-14.
- Shang-Jin Wei, 2000.
"How Taxing is Corruption on International Investors?,"
The Review of Economics and Statistics,
MIT Press, vol. 82(1), pages 1-11, February.
- Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," NBER Working Papers 6030, National Bureau of Economic Research, Inc.
- Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," William Davidson Institute Working Papers Series 63, William Davidson Institute at the University of Michigan.
- Gastanaga, Victor M. & Nugent, Jeffrey B. & Pashamova, Bistra, 1998. "Host Country Reforms and FDI Inflows: How Much Difference do they Make?," World Development, Elsevier, vol. 26(7), pages 1299-1314, July.
- World Bank, 2002. "Transition, The First Ten Years : Analysis and Lessons for Eastern Europe and the Former Soviet Union," World Bank Publications, The World Bank, number 14042, November.
- Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Aggregating governance indicators," Policy Research Working Paper Series 2195, The World Bank.
- Posner, Richard A, 1998. "Creating a Legal Framework for Economic Development," World Bank Research Observer, World Bank Group, vol. 13(1), pages 1-11, February.
When requesting a correction, please mention this item's handle: RePEc:eee:worbus:v:42:y:2007:i:1:p:80-98. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.