Abstract
Although the internationalization of economies is driven by specific industry conditions or business-specific differences, the institutions that exist as background conditions directly determine firms’ strategies and interactions in the international environment. This paper contributes to the discussion on the relationship between institutional quality and outward FDI (OFDI). We used 30 indicators in 48 emerging economies in the period 2007–2017; we collected the indicators from alternative secondary sources. After we applied Factor Analysis, six factors were retained. We named the components as follows: “Transparency of government” (F1), “Research, development and innovation, R&D+I” (F2), “Inequality” (F3), “Rules on inward FDI (IFDI)” (F4), “Education and training” (F5), and “Financial market” (F6). The panel data model outcomes suggest that Factor 2, Research, development and innovation, has a significant and positive effect on OFDI. Factor 6, the Financial market, has a significant and negative effect on OFDI. When we include lagged values of OFDI stocks the results also show that the government measures transparency positively and significantly affects OFDI stocks. These findings imply that the institutional environment creates two streams of OFDI: leverage and escapism.
Highlights
Institutions are crucial for understanding the shape of human interaction
Followed the criteria explained in section methods, we found that 11 factors explain at least 90% of the variance
We found that more financing through the local equity market and venture capital availability exists in the home country’s economy, thereby discouraging outward FDI (OFDI)
Summary
Institutions are crucial for understanding the shape of human interaction. “In consequence, they structure incentives in human exchange, whether political, social, or economic” [1]. Many development economists and academics from sociology, anthropology and political science recognized the consistency of North’s arguments; they were sure of the value of their insights into the development process and, in particular, into the economic significance of institutions other than markets. The works of Ostrom [2] and Acemoglu, Johnson and Robinson [3] are under the influence of North’s work, and they are the basis of the analysis that influenced the literature in development, internationalization and competitiveness. In this sense, it is widely acknowledged, both on empirical and theoretical discussions, that the institutional quality is closely related to growth and economic development. The set of institutions (inclusive and extractive) in a specific economy is called the institutional framework [3,4,5,6,7]
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