Upmarket and Downmarket OFDI in Response to Reforms

Abstract

We analyze the impact of the level of pro-market reforms on outward FDI. Pro-market reforms are the transformation of institutional frameworks and regulations required for markets to function properly. Building on the institution-based view, we propose that higher levels of reforms in the home country induce domestic firms to improve their competitiveness to international levels, enabling them to invest abroad and become multinationals. Moreover, we argue that the level of reforms in the home country influences the destination of their investment, with higher levels of reforms enabling firms to become more internationally sophisticated competitors and invest upmarket in more advanced countries than their home country. We test these arguments on a sample of 45,291 bilateral OFDI flows covering most of the globe from 1995-2010.