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Evidence for the effect of monitoring costs on foreign direct investment

Bruce Blonigen, Anca Cristea and Donghyun Lee

Journal of Economic Behavior & Organization, 2020, vol. 177, issue C, 601-617

Abstract: A proposed reason for the significant inverse relationship between distance (both physical and cultural) and foreign direct investment is the increased costs for a parent firm to monitor an affiliate when there is greater distance between them. We provide the first direct test of this hypothesis using O*NET data on occupational skills to construct industry-level measures of the importance of monitoring-related skills. We exploit this cross-industry variation to examine whether physical and cultural distances have a greater impact on cross-border M&A in industries where monitoring-related skills are more important. Using data on worldwide cross-border M&A activity from 2005 through 2014, we find significant evidence for the effect of monitoring costs on cross-border M&A activity. We also show that the relatively low importance of monitoring-related costs in manufacturing industries compared to those in other sectors is an important factor in explaining why cross-border M&A in manufacturing is so large despite its relatively small share in most countries.

Keywords: Mergers; Acquisitions; Inspection costs; Distance; Cultural distance (search for similar items in EconPapers)
JEL-codes: D22 F21 F23 G34 L22 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:177:y:2020:i:c:p:601-617

DOI: 10.1016/j.jebo.2020.06.008

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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