Evidence for the Effect of Monitoring Costs on Foreign Direct Investment
Anca Cristea () and
No 25933, NBER Working Papers from National Bureau of Economic Research, Inc
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 then 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 1985 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 of the modern economy.
JEL-codes: D22 F21 F23 G34 L22 (search for similar items in EconPapers)
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Published as Bruce A. Blonigen & Anca Cristea & Donghyun Lee, 2020. "Evidence for the effect of monitoring costs on foreign direct investment," Journal of Economic Behavior & Organization, vol 177, pages 601-617.
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