Information voids and cross‐border bandwagons of foreign direct investment into an emerging economy

Abstract

AbstractResearch SummaryThis study examines cross‐border bandwagons of foreign direct investment (FDI), a mass FDI entry process, into an emerging economy by following global investors from multiple home countries. Complementing the frequency mechanism, we introduce a cohesion mechanism that can also drive cross‐border bandwagons of FDI. Drawing on the notion of information voids, we submit that the two mechanisms are based on different origins of information, and their relative effects vary depending on the extent of information voids in the host country. Analyzing a firm‐level data set of Japanese firms’ FDI entries into China between 1986 and 2000, we find a high level of information voids in the host country strengthens Japanese firms’ cohesion‐based cross‐border bandwagons of FDI, while suppressing their frequency‐based cross‐border bandwagons of FDI.Managerial SummaryCross‐border bandwagons of FDI into emerging economies have been a prominent phenomenon driving globalization in the past three decades. It is noteworthy that global investors from different countries contributed unequally to this process. This is because the information voids in an emerging economy create challenges for global investors to effectively source FDI bandwagon information from other countries, restricting the frequency mechanism in driving cross‐border bandwagons of FDI. In this article, we introduce a new cohesion mechanism in driving cross‐border bandwagons of FDI: an investor's international networks of FDIs. We then compare the relative effectiveness of the two mechanisms and find that the frequency mechanism weakens while the cohesion mechanism strengthens, when the level of information voids in a host country increases.