Rights, governance, and foreign direct investment: an industry-level assessment

Abstract

Theories of multinational enterprises emphasize that foreign direct investment (FDI) is undertaken in different industries for different reasons, yet studies of the effects of rights and governance on FDI generally rely on aggregate-level FDI data. This paper evaluates US FDI outflows to 15 industries (eight manufacturing, seven non-manufacturing) in 54 countries in a linear dynamic panel data gravity FDI model using a ‘system’ generalized method of moments estimator and several widely used rights and governance indexes. At the aggregate level, we estimate that stronger rights and governance have a positive effect on FDI, consistent with most prior studies. At the industry level, we estimate larger positive effects of rights and governance on FDI for service than manufacturing industries, particularly for the information and the finance and insurance industries.