The Determinants of Outward Foreign Direct Investment from Latin America and the Caribbean: An Integrated Entropy-Based TOPSIS Multiple Regression Analysis Framework

Henrique Correa da Cunha,Vikkram Singh,Shengkun Xie

doi:10.3390/jrfm15030130

Abstract

Given that home country factors play a major role in the internationalization of emerging market firms, there is an ever-growing debate on how they influence the intensity of outward foreign direct investment (OFDI) from these regions. This study investigates how home country factors affect the OFDI intensity in Latin America and Caribbean (LAC) countries. We use the entropy weight method, which uses the Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) method and a balanced panel data consisting of 19 countries from 2007 to 2016. The results show a positive association between macroeconomic performance, formal institutions, infrastructure, technology and the OFDI intensity. Furthermore, we find that robust formal institutions, along with the quality of infrastructure and technology, positively moderate the relationship between macroeconomic performance and the OFDI intensity. These findings show that the internationalization of LAC firms is highly dependent on the contextual conditions in their markets.

Highlights

The political and economic changes during the last decade of the 20th century have profoundly impacted the dynamics of the global economy
Inward Foreign Direct Investment (IFDI) in the region grew from USD 8.5 billion to USD 104.7 billion from 1990 to 1999—the GDP more than doubled, final consumption expenditure increased from USD 750 billion to USD 1.8 trillion, and annual inflation declined from nearly 22% to less than 3.5% (World Bank 2021)
Unlike formal institutions that negatively moderate the relationship between macroeconomic activity and the outward foreign direct investment (OFDI) intensity in Latin America and Caribbean (LAC), we propose that the quality of infrastructure and technology moderate such a relationship in the opposite direction

Summary

Introduction

The political and economic changes during the last decade of the 20th century have profoundly impacted the dynamics of the global economy. The Latin America and Caribbean (LAC) region, previously noted for protected, inefficient, and outdated domestic industrial sectors and unstable political conditions, observed improvements spurned by accelerating domestic reforms (Santiso 2013; Aguilera et al 2017) These changes offer enormous opportunities for experienced foreign multinational companies to increase their presence in the region. Inward Foreign Direct Investment (IFDI) in the region grew from USD 8.5 billion to USD 104.7 billion from 1990 to 1999—the GDP more than doubled, final consumption expenditure increased from USD 750 billion to USD 1.8 trillion, and annual inflation declined from nearly 22% to less than 3.5% (World Bank 2021) These changes create favorable conditions for IFDI, the increased competition can force domestic firms to catch up with their foreign counterparts by intensifying their investments abroad in more favorable regions (Fleury and Fleury 2011; Cuervo-Cazurra and Narula 2015). While several studies document this phenomenon (Goldstein and Shaw 2007; Gammeltoft 2008), the literature lacks a consensus on how domestic conditions affect the OFDI flows from emerging markets (Cuervo-Cazurra et al 2018)

Methods

Results

Conclusion