Personal Networks, State Financial Backing, and Foreign Direct Investment

Abstract

The “new, new trade theory” argues that firm-specific attributes such as size explain why large firms predominantly engage in foreign direct investment (FDI) and thus reap most of the rewards of globalization. However, studies have neglected the importance of firms’ political influence over core financial institutions. I argue that large firms engage in greater FDI in part because of their political connections, which allow them to receive government loans in support of FDI. Using a unique, hand-coded dataset that includes 4936 directors of South Korean firms and these firms’ FDI announcements, I show that firms that place elite financial officials on their boards engage in greater FDI than firms without such board-member connections. Therefore, the outsized gains that large firms receive from globalization are dependent on their political ties to their home government.