Home Country Institutions and Outward FDI: An Exploratory Analysis in Emerging Economies

Abstract

Although the internationalization of economies is driven by specific industry conditions or business-specific differences, the institutions that exist as background conditions directly determine firms’ strategies and interactions in the international environment. This paper contributes to the discussion on the relationship between institutional quality and outward FDI (OFDI). We used 30 indicators in 48 emerging economies in the period 2007–2017; we collected the indicators from alternative secondary sources. After we applied Factor Analysis, six factors were retained. We named the components as follows: “Transparency of government” (F1), “Research, development and innovation, R&D+I” (F2), “Inequality” (F3), “Rules on inward FDI (IFDI)” (F4), “Education and training” (F5), and “Financial market” (F6). The panel data model outcomes suggest that Factor 2, Research, development and innovation, has a significant and positive effect on OFDI. Factor 6, the Financial market, has a significant and negative effect on OFDI. When we include lagged values of OFDI stocks the results also show that the government measures transparency positively and significantly affects OFDI stocks. These findings imply that the institutional environment creates two streams of OFDI: leverage and escapism.