The Role of Governance on Outward Foreign Direct Investment in Emerging Market Economies

The Role of Governance on Outward Foreign Direct Investment in Emerging Market Economies

Adem Gök (Kırklareli University, Turkey)
DOI: 10.4018/978-1-5225-2345-1.ch005
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Abstract

Emerging market economies have clear deficit in governance infrastructure and also have an increasing trend in the amount of foreign direct investment (FDI) outflows compared with advanced countries. Hence the main issue of the study is to identify the determinants leading to the increase in FDI outflows with special emphasize given to the role of governance infrastructure. Thus, the aim of the study is to analyze the effect of governance infrastructure together with other control variables on FDI outflows in emerging market economies. It is found that improvement in all measured aspects of governance infrastructure leads to increase in FDI outflows from emerging market economies and governance infrastructure, human capital and physical infrastructure are base factors for MNCs taking outward FDI decision from emerging market economies. It is also found that FDI outflows from emerging market economies are not market or efficiency seeking; instead they are resource, labor or finance seeking.
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Background

There are numerous studies in the literature that have concentrated on the role of governance on inward FDI. The studies examining the role of governance on outward FDI or considering governance as a determinant of outward FDI are limited (Globerman et. al., 2006; Witt and Lewin, 2007; Kayam, 2009; Das, 2013; Subasat and Bellos, 2013; Klimek, 2015). Also, there are other studies in the literature analyzing the effect of host country governance on outward FDI of home countries such as Mishra and Daly (2007). This type of studies is not included in the empirical survey.

Globerman et. al. (2006) found statistically significant positive effect of governance on outward FDI in both emerging and transition European economies and emerging markets for the period 1995-2001. They used principal component analysis of six main WGI governance variables as a proxy for overall governance performance of the countries. They had only three-year data for each governance indicator, hence they extrapolated them which may lead to biased results since 57% of governance data were extrapolated.

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