Institutional Distance and Brazilian Outward Foreign Direct Investment

Abstract

Different studies have discussed the factors that influence outward foreign direct investment (OFDI) from developing countries. However, the choice of location and the role of institutional distance are still controversial. The aim of the present paper is to address the determinants of OFDI from Brazil from the perspective of the host countries. Using a panel data model, we have tested the impact of cultural and institutional distances on OFDI, and noted the moderating effects of the economic performance of the host country. The results show that institutional difference has a positive effect on OFDI; however, such effect is constrained by the size of the host country and the amount of its bilateral trade. We have found no statistically significant relationships between cultural distance and OFDI, but in our study geographical proximity had a positive effect on the strategy of Brazilian OFDI. The results pointed to two main implications. First, the positive effect of institutional distance on OFDI may be constrained by the bilateral trade flows between home and host countries. Second, multinational companies from Brazil are more likely to invest in a culturally distant country when it delivers better institutional performances, which suggests that there is a complementary relationship between cultural and institutional distance.