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Institutional distance and foreign direct investment

Author

Listed:
  • Rafael Cezar
  • Octavio Escobar

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. Copyright Kiel Institute 2015

Suggested Citation

  • Rafael Cezar & Octavio Escobar, 2015. "Institutional distance and foreign direct investment," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 151(4), pages 713-733, November.
    • Handle: RePEc:spr:weltar:v:151:y:2015:i:4:p:713-733
    DOI: 10.1007/s10290-015-0227-8
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    More about this item

    Keywords

    Foreign direct investment; Institutions; Heterogeneous firms; Gravity model; F12; F23; H80; K20;
    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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