Preserving FDI: Institutions, Crisis, and Exit

• In Event: Domestic and International Institutions and Foreign Investment

Abstract

There is now a robust literature on how domestic and international institutions affect patterns in FDI. The general consensus is clear: Institutional arrangements that constrain policy makers and mitigate “political risk” are expected to boost FDI by assuaging MNCs’ worst fears. Both theoretically and empirically, however, most studies in this vein focus on this relationship in the context of prospective risk and new investment. Notably less research has been done on how and when such institutions influence the behavior of MNCs already operating in a host market, leaving a serious gap in our knowledge. That is the subject of this paper. Specifically, I argue that (1) FDI termination increases with the onset of major political change or crisis; but (2) that the strength of this relationship is conditioned by host countries’ institutional composition. I test this hypothesis using new firm-level data on more than 20,000 MNCs between the years 1994-2018. The results indicate that both domestic and international institutions play an important role not only in encouraging the formation of new FDI partnerships, but in preserving existing partnerships during times of political and economic disruption.

Author

• Colin Barry