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Evidence for the Effect of Monitoring Costs on Foreign Direct Investment

Bruce Blonigen, Anca Cristea () and Donghyun Lee

No 25933, NBER Working Papers from National Bureau of Economic Research, Inc

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 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)
Date: 2019-06
Note: IO ITI
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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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