Liability of Foreignness: Product Distance, Institutional Distance and FDI

Alyson C. Ma and Ryan D. Ratcliff

International Journal of the Economics of Business, 2020, vol. 27, issue 1, 93-110

Abstract: We empirically analyze the relevance of a country’s export mix in offsetting the liability of foreignness when internationalizing through foreign direct investment. Using a gravity model, we demonstrate that countries with a similar mix of exports will tend to have higher FDI flows between them, even when controlling for per-capita income. We also show that the inclusion of export mix reduces the estimated importance of institutional similarities. Lastly, we discuss which firm-level motivations for internationalization are most consistent with our country level evidence.

Date: 2020
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DOI: 10.1080/13571516.2019.1651152

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