Travel Distance and Corporate Investment Policy

Abstract

We investigate how geographic distance relates to corporate investment decisions (i.e., investment location and ownership structure choices), using a setting of Taiwanese firms’ investment in mainland China. We measure geographic distance as travel time between parent firms (in Taiwan) and subsidiaries (in mainland China). Our identification strategy relates to the deregulation of flight routes between Taiwan and mainland China, which allows direct flights to each Chinese province. This deregulation results in variations in geographic distance across time and enables a difference-in-difference research design. Our analyses show that greater geographic distance is associated with a lower investment likelihood and a lower likelihood of 100% ownership (i.e., entire ownership) versus less than 100% ownership (i.e., shared ownership). We also find a negative association between geographic distance and investment performance. Geographic distance appears to limit firms’ access to information and thus influences their selection of investment locations and their control choice (i.e., ownership structure) to mitigate post-investment control problems.