Institutional Distance and Foreign Direct Investment

Rafael Cezar and Octavio Escobar

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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.

Keywords: Foreign Direct Investment; institutions; heterogeneous firms; gravity model (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-bec, nep-cse and nep-int
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Citations: View citations in EconPapers (28)

Published in Review of World Economics, 2015, 151 (4), ⟨10.1007/s10290-015-0227-8⟩

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Journal Article: Institutional distance and foreign direct investment (2015)
Working Paper: Institutional distance and foreign direct investment (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01270939

DOI: 10.1007/s10290-015-0227-8

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