Legal and Cultural Contingencies in the Foreign Portfolio Versus Foreign Direct Investment Decisions Across Countries: An Institutional Fit Perspective

Tariq H. Malik ()
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Tariq H. Malik: Liaoning University

Journal of the Knowledge Economy, 2024, vol. 15, issue 3, No 31, 10748-10780

Abstract: Abstract This study aims to contrast the foreign portfolio investment and foreign direct investment decisions through the lenses of legal and cultural distances, followed by the cultural moderation between legal and investment modes. This aim fills the gap in the literature on international equity investment decisions that show inconsistencies because prior studies do not separate FPI (foreign portfolio investment) and FDI (foreign direct investment). Most of those studies use either legal distance or cultural distance to explain the investment decision but not together. The moderating role of national culture between legal distance and investment decisions serves this aim and fills this empirical gap. The sample comprises 51,198 events of equity investment between 2007 and 2009. The sample came from 120 home countries and 154 host countries in high technology. A logit (non-parametric) mode was used to compare FPI versus FDI. The result shows that legal distance between home and host country induces FDI; cultural distance induces FPI by the odds of 1.1. Through the interaction effects, the preference for FPI remains 1.1 when legal and cultural distances are high. Because the net effect of legal distance becomes insignificant and the net effect of cultural distance is significant, cultural distance has an ultimate explanation through legal distance. Thus, we make a case for an integrated framework and disintegrated equity investment decisions to support theory and guide practice for policy and practice. We also suggest that policy makers should appreciate cultural distance more than legal distance.

Keywords: Foreign portfolio investment (FPI); Foreign direct investment (FDI); Information and communication technology (ICT); Legal distance; Cultural distance; Institutional framework (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s13132-023-01526-z

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