Varieties of FDI and Institutional Determinants : Evidence from Norwegian FDI, 1998-2006

Abstract

While the empirical literature on host-country institutional determinants of foreign direct investment (FDI) has grown voluminous, researchers often fail to agree upon the net effect of institutions on FDI. This black box of incongruousness is assessed by theoretically and empirically acknowledging FDI and multinational enterprise (MNE) heterogeneity.

Two contributions are made to the field of research. The theoretical contribution consists of a basic framework developed for generating expectations around the institutional determinants of FDI at a disaggregated level. Therein, institutional mechanisms are unbundled into four categories: personal freedoms; political governance; economic interaction; economic regulation. The four categories account for seven institutional concepts: human rights protection; labor standards upholding, political preference aggregation; control of corruption; property rights protection; contract enforceability; quality of banks and credit. Second, FDI is disaggregated on the basis of the three sectors of economic activity: natural resources; manufacturing; services. Third, expectations as to the relative salience of the seven institutional concepts across FDI from the different sectors are formulated. The variations in expectations are formed as a function of sector-specific idiosyncrasies in production and host-country integration by MNEs. This I label The Varieties of FDI framework.

The empirical contribution is an analysis of FDI and MNE heterogeneity, using data on Norwegian outward FDI across sectors from 1998 to 2006. To investigate if working with aggregate numbers conceal unaccounted for diversity, FDI from the three sectors are regressed on a set of baseline variables, and benchmarked up against estimates from regressing total FDI on the same variables. Next, the expectations developed in the theoretical framework are assessed in sector-specific models. I find that the institutional determinants of FDI in different sectors are highly diverse, except for control of corruption which seems to impede FDI in all sectors. Control of corruption is also the only robust determinant of natural resources FDI. For manufacturers, on average found most attentive to policy climates, robust relationships are found between indicators of political governance, economic interaction, and economic regulation and FDI. The only robust predictor of services FDI, apart from control of corruption, is human rights protection.