“When does foreign investment carry baggage from home?” by Dr. Reid W. Click
Dr. Reid W. Click
Associate Professor of International Business and
The George Washington University
The prevailing paradigm in the FDI literature presumes that countries’ institutions have locational barriers at national borders. We introduce a heterodox paradigm based on a lack of geographic detachability (defined as the MNE leaving behind its home institutions when it internationalizes) from home‐country institutions in cross‐border investment, and develop hypotheses based on its implications for managers’ expectations of investment performance. Using data on acquisitions of petroleum reserves, we test whether outward FDI carries MNEs’ home‐country institutions with it (“baggage from home” – the concept that home institutions travel abroad with MNEs, providing disadvantages when they are weak and advantages when they are strong). After controlling for a number of firm‐ and transaction‐specific influences, we find that weak (respectively, strong) home‐country institutions reduce (respectively, increase) managers’ valuation of petroleum reserves, suggesting that home institutions cross international borders with outward FDI. We also show that, once accounting for home‐ and host‐country institutions, the (discrete) border itself and the (continuous) geographic distance to the host country are irrelevant for foreign asset valuation. Furthering the investigation into when foreign investment carries baggage from home, we show that the effect of home‐country institutions depends positively on firms’ experience, indicating that foreign investment carries home‐country institutions with it when managers have an ability to leverage stronger institutions. Altogether, our findings support the heterodox paradigm and the notion of geographic nondetachability of home institutions.