Host Country Openness and US FDI
Outflows: evidence from European host
countries
Yuan Zhou (s2128489) University of Groningen Faculty of Economics and Business
ABSTRACT
Targeting at the rapidly increasing FDI activities, this paper discusses possible determinants of the US FDI outflows into European countries. Specifically, this study explores the host country character, namely openness, in depth and how it can affect the US direct investment outflows to the certain host country. This research will analyze the concept of openness from two different perspectives: ① cultural openness; ② economic openness towards FDI. Offering explanation of these concepts and linking openness with FDI outflows, the author develops the argument based on 2 main theories: ① cost control theory and ② trust theory. Panel data from 2000 to 2010 are used to test how 3 cultural factors: individualism, uncertainty avoidance and power distance, and economic openness of the host country can influence US FDI outflows by influencing the decision of US investors. The empirical results show that uncertainty avoidance has negative relationship with FDI outflows. And other factors have positive effects on FDI outflows.
The major contribution of this research is connecting cultural dimensions and FDI outflows. These social value dimensions are explained as essential factors that affect host country openness and thus affect the US FDI outflows. Coupled with economic openness, the study offers new understanding of openness and illustrates the influence cause by openness.
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1. Introduction
In the last three decades, foreign direct investment (FDI) has experienced a significant increase and has been one of the most widespread forms of international economic activity. As a central part of the globalization process, FDI has substantially changed the landscape of the world economy. It’s commonly known that now FDI has exceeded the growth of world production and the growth of international trade. Led by these existing trends, economic researchers have showed substantial interest on empirically investigating the fundamental factors which drive FDI behavior.
On one hand, from investors’ perspective, the major reason of their international activities via FDI seems to be driven by market-seeking considerations (Markusen, 2002). Directly investing in foreign countries is more than just a good method to expand their business and enter foreign markets, but also a major approach for investors to increase the return of the firm.
On the other hand, from a host country perspective, FDI is able to increase competition and give rise to positive technological externalities and spillovers, thereby raising dynamic efficiency (Gastanaga et al., 1998), and help reduce the local employment pressure. Without any surprise, host countries now start to value the inward-FDI as well. In addition to this, Fabry and Zeghni (2006) pointed out in their study that “FDI can help transitional countries to achieve modernization, industrial upgrading and improve productivity by importing foreign technologies and knowledge.” FDI is also helpful to develop international trade (Paas, 2003). The importance of FDI has been highlighted, and encouraging FDI is considered as a method to encourage economic growth.
Therefore, understanding the determinants of investor’s decision of where FDI will go becomes increasingly interesting to academics and policy-makers.
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internalize the activities by FDI rather than using the market such as by exporting or licensing; (3) has advantages in locating in the foreign country rather than at home. Anyway, at a general level, in order for a country to be more attractive to FDI flows, there is a need to ensure an enabling environment by reducing costs (Ramkishen S. Rajan, 2004).
From an investors’ perspective, this paper investigates the influence of host country openness on the decision of FDI. Du et al. (2012) stated in their search that the decision of a foreign-invested enterprise to enter a foreign market depends crucially on its knowledge and experience with the local market. In this case, a relatively more open host country offers an investment environment which is easier to access, both culturally and economically.
Hypotheses are raised to reveal the positive relationship between host country openness and FDI outflow from a certain home country. This research offers empirical evidence of the influence on FDI outflows caused by host openness.
2. Literature review
Openness
To reveal the relationship between host country openness and FDI outflow, first we have to understand the term openness. De Jong et al. (2006) define openness as the unrestricted integration of national markets in the global economy. In such a completely open economy, the economic agents should be able to behave freely on economic (market-guided) incentives.
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empirically. And further, the openness per se is seldom analyzed and linked to FDI attractiveness as a key factor.
In case of host country openness, cultural openness, financial openness, and regulatory openness is all interesting to investigate. To provide a new understanding of host country openness, in this research, the author divides it into 2 parts: ① cultural openness and ② economic openness. There is an old idea that foreign invested enterprises sometimes give priority to the markets perceived to be psychologically close. It is argued that psychically close countries can reduce uncertainty over investment prospects and facilitate learning about the target countries (Johanson & Vahlne, 1977, 1990; Kogut & Singh, 1988). However, in my opinion, this argument failed to understand openness comprehensively. The risks brought by the close FDI environment may even be higher than the uncertainty generated by the host country market. As the development of FDI activities, MNCs now have more experiences to protect themselves in such international business projects. Close host country only brings more costs and difficulties of entering.
As stated above, openness contains not only economic openness, but also cultural openness. This paper will examine host country openness from these two perspectives.
(1) Cultural openness
When examining why the investors commit different amount of FDI outflows to different host countries, differences in culture, represented by different religions and languages, should never be ignored. The cultural openness is the openness that based on the social value dimensions. Cultural openness has influence on the way people behave and react the unfamiliar things, such as foreign firms or working styles. These reactions sometimes turn out to be conflicts.
(2) Economic openness
Economic openness is a common examined concept in FDI literature. The importance of economic openness can be illustrated by the flexibility of the foreign firm to manage their production, resources or financial capital, etc.
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The connection between FDI outflows & host country openness
In the previous researches, we can find some theoretical support of the connection between FDI outflow and host country openness.
First of all, we need to understand the incentives of FDI. Why companies expand across borders by means of foreign direct investment? Researchers have offered many ideas to explain the motivation and determinants of FDI. An essential question lies behind FDI activity is that why a firm would sometimes prefer to service a foreign market via affiliate production, rather than other options such as exporting or licensing arrangements. The presence of intangible assets specific to the firm is the key to the answer. Here the intangible assets refer to technologies, managerial skills, etc. These assets are public goods within a firm to the extent that using such assets in one subsidiary does not diminish use of the asset in other subsidiaries. This offers explanation to the facts that why firms with such assets are more likely to go international (Blonigen, 2005). However, due to the high transaction cost of intangible assets and the difficulties to protect them, investors tend to be very careful when they make the decision to commit their resources to a foreign market. But higher openness level of the host country can help reduce the costs of intangible assets and even the risk of technology loss. The situation of a host country with higher openness level is generally easier for foreign managers to learn, because of the various accesses to the information of the country. Consequently, the uncertainty of operating in such market is relatively lower. Thus, the host country openness can encourage foreign investors and attract FDI.
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and skilled managers to conduct the process. Therefore, a more open host country, with lower barrier of foreign enterprises, will be much more attractive for investors.
Furthermore, behind the FDI activities of multinational corporations (MNCs), Dunning (1996) identified 4 types of motive: ① resource seeking; ③ market seeking; ③ efficiency seeking; ④ strategic asset or capability seeking. These motives are defined as economic determinants with two other FDI determinants by UNCTAD (1998), such as host country’s policy framework and business facilitation. Policy framework here refers to the social and political stability, regulations in terms of entry and operations, fair competition between foreign and domestic companies, and international agreements regarding FDI. Business facilitation means to provide foreign investors, for example, investment incentives, government promotional activities, and administrative support, etc.
The argument above tells us that understanding the incentives of the investors to apply their resources to the project can help explain what kind of host country is more attractive to FDI. From an investor’s perspective, the host country condition, such as openness level is a key consideration when making FDI decisions. Identifying the role that openness is playing in the FDI determinants helps uncover the relationship between host country openness and FDI outflows. Without surprise, there has been considerable research into the patterns and other determinants of FDI decisions from several different perspectives.
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the host countries provide has significant influence on the cost that may occur during the transaction. However, in spite of their key role in explaining the internationalization of firms, systematic analyses of such costs amount are just a few conceptual discussions. In another word, relatively lower cost of investment can be one of the advantages of a certain host country to attract foreign direct investment. Thus, higher openness level can encourage FDI.
Anyway, to in the FDI projects, investors also care about the competitive conditions that host countries can offer for production and sales. As to investors, when an exclusively local firm decides to go international, they are facing a much more complex environment in its economic, cultural and political respects. Moreover, it is more complex because of the various dimensions that involving more uncertainty in the international situations (Hosseini, 2005). Therefore, investors will only commit their resources into such market with certain understanding of host country cultural environment. If the host country is closed and its culture is difficult to learn, then the risk of opportunistic behavior of local employees or even the local partner will be higher. Considering this, the investors tend to invest in more open host countries.
In addition, making FDI decisions will require a consideration of various economic factors such as economies of scale, the size of the market in the host country (or region), the availability of needed human resources and the level of their skills, and for extractive industries, the availability of the resources to be extracted (Hosseini, 2005). Former research has also found that the FDI environment of host country directly affects FDI flows (Lim, 2008).
Some research has focused on the economic environment of the host country and how it can influence FDI flows. Blonigen (2005) believes that exchange rate uncertainty can affect FDI flows, depending on firm characteristics. Taxes, institutions and trade protection also have influence on FDI. Host country economic openness now presents its influence on the economic environment. A more open host country should be less restrictive towards FDI, thus we can expect lower taxes and better financial flexibility the FDI project may have.
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important construct and that the field is in need of additional understanding about culture and its effects”. In fact, in Hosseini’s view (2005), these writers only quote Dunning’s explanation that: “firms which are best able to identify and reconcile (cultural) differences, or even exploit them to their gain, are likely to acquire a noticeable competitive advantage in the market place.”
Some other studies show that culture factors have influences on FDI flows. Both Schneider and De Meyer (1991) and Hofstede (1980) believe that, in different countries, managers will make different strategic decisions because of the different cultural values they possess. Erramilli (1996) states in his work that differences in national cultures can result in different organizational and administrative practices and employee expectations. The most popular cultural factor that has been investigated is the cultural distance. Du et al. (2012) believe that cultural similarities or dissimilarities between the FDI source countries/areas and China can affect the sensitivity of FDI flows to the economic institutions of different regions. It can be expected that the more culturally distant are two countries, the more distant are their organizational characteristics on average (Kogut and Singh, 1988). This implies that when the cultural distance is large, the foreign investor is more likely to commit fewer assets to the market in order to control the risk.
Among the factors of host country environment, however, few researches have emphasized the influence of host country openness. Openness is only included in the previous studies as an indicator of the economic ease of access to foreign capital inputs. In the former researches, openness has not been considered as an important factor that linked with the FDI flows. Nevertheless, an open host country often provides better environment for foreign direct investments. Not only the foreign capital, but also the foreign brand or management style can be accepted in such open environment. Even though results vary in empirical studies, openness is one of the determinants identified as being more likely to be robust when compared to other potential FDI determinants (Seim, 2009). For foreign investors, it will be much easier to conduct business in a more open host country. In this paper, to fill the research gap, I want to investigate the host country openness and its relationship with FDI outflows.
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both cultural factors, in sense of common cultural value factors, and economic factors can affect the FDI outflows to different host countries. To investigate openness from these two perspectives can offer us a deeper understanding of openness and hopefully uncover some new determinants of FDI outflows that have never been tested. In this paper, the author will offer a better explanation of host openness regarding FDI outflows. The research question therefore is formulated as follow:
What is the relationship between host country openness and the FDI outflows towards it?
To formulate the linkage between host country openness and the FDI outflows, 2 important theories need to be introduced.
Cost control theory
The first one is cost control theory. Costs are important to all industries. Cutting costs is the simplest way to improve the manager’s bottom line. Researcher Casson (1987) argued that internalization has connection with transaction cost theory. In order to pursue more benefit from those FDI project, foreign investors will attempt to minimize the transaction cost throughout the entire investment. Chan and Makino (2007) explain that the choice of foreign direct investment by MNCs is based on a comparison of the costs and benefits. Economic considerations, such as the desire to minimize investment risk and costs, increase resource access opportunities, and secure greater control over the operation of the subsidiary, are usually the drivers of this comparison.
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Other than transaction costs and labor costs, the managerial costs in the entire FDI project may be another important consideration for the investors. Working with people form another culture may generate certain problems, such as lower working efficiency due to bad communication, higher agency costs, etc. If the host country is more open, employees will tend to easier to trained, since they can accept foreign culture better. Such cost of training will then be relatively lower. Moreover, high cost of foreign capital to operate in the host country market can be another reason for lower attractiveness to FDI. It can be inferred that a host country which is offering an environment with lower costs may attract more FDI flows.
Based on the cost control principle, investors tend to commit more investment into a more open host country. When the openness level of the host country is higher, culture in this environment will be relatively easier to learn by aliens. People in such an open country will have better acceptance and tolerance of foreign working style. The expected conflicts will be less. Correspondingly, the costs caused of solving problems caused by culture differences and communication barriers will be relatively lower. Further, the FDI projects will be easier to control in such open environment. This results in less agency costs of the certain FDI project, and the investors will be motivated to commit more productive assets in the project. Therefore, we could expect for more FDI flows to a host country which is high in openness level.
All in all, openness can motivate FDI by reducing costs.
Trust theory
The other theory is the influence of trust on FDI. MNCs are the control centers for a large portion of international transactions other than FDI (Blonigen, 2005). To control FDI projects, investors need to build trust with local partners. In a more open country, trust is easier to build and people are not so scared by the risk of being controlled. Thus the foreign investors will have better chance to get better control of the projects. This encourages the inward FDI. In the conservative environment, investors are facing more risks of default and opportunistic behavior by the local partners. Less open environment suggests more difficulties for the investors or the project managers to predict and prevent such loss.
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As mentioned before, culture factors have been proven to have significant effects on willingness of investors to commit assets in FDI projects. Investors will tend to minimize the cost of the FDI projects not only when establishing the subsidiary, but also in the operation period after establishment. The level of host country culture openness can influence the investors’ choice by influence the efficiency of the projects. Inefficiency leads to high management cost. The way local employees react to the foreign manager will differ due to local cultural openness. According to De Jong et al. (2006), among the 5 cultural dimensions, individualism has positive effects, and uncertainty avoidance and power distance have negative effects on openness.
Firstly, De Jong et al. (2006) indicate that people in the societies, which are highly individualistic, are easier to engage in such business relationships with persons from strange cultural backgrounds than agents in collectivistic societies. This is because that the general interest of the group that they belong to will not restrain them from making their own choice to pursue some individual benefit. Thus they will be able to act individually on their personal economic incentives. Therefore, in a country that the individualism score is higher, people are more culturally open and are easier to motivate to perform better in a firm controlled by foreigners.
Secondly, as for uncertainty avoidance, people in the societies, which have higher score on uncertainty avoidance, will accept relatively less exogenous risks, and be more resistant to foreign people like immigrants and be less prepared to live abroad (Ornauer et al, 1976). Thus they will be less open.
Thirdly, people in countries which score high on power distance will normally have more freedom and feel more secured in their privileged position. According to De Jong et al. (2006), these people tend to have little incentive to open up the economies, because of the threat that may posed by the external forces to their current comfortable position. Based on all the theory stated above, I believe that these cultural dimensions could help foreign investors to estimate the cultural openness level of a target host country.
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significant influence on the ownership structure choice. All in all, coupled with the 2 theories introduced before, 3 hypotheses are reached.
Hypothesis 1: The host country individualism level is positively related to the US FDI
outflows towards it.
Hypothesis 2: The host country uncertainty avoidance level is negatively related to the
US FDI outflows towards it.
Hypothesis 3: The host countries that score high on power distance power distance will
have lower US FDI outflows towards it.
(2) Economic openness
In many former studies of FDI, economic openness is commonly used as a control variable. In this paper, the author includes the annual trade as a percentage of GDP to represent the overall attractiveness of the country to foreign investment. In the growth theory, openness to trade offers access to imported inputs, which embody new technology; increases the effective size of the market facing producers, which raises the returns of innovation; and affects a country's specialization in research-intensive production (Harrison, 1996).
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2002). For another, Horst (1972) and Pain and Wakelin (1998) presented support in their studies to the FDI–trade substitutability. Therefore, we can somehow consider that FDI and trade have mutual interaction to each other.
In our case of FDI projects, when the host country can trade freely, the FDI environment will be correspondingly better. Economic openness has various measurements. Financial openness and regulatory openness is part of the economic openness. Financial open host country enables investors to finance through different channels. Anyway, an open trade environment provides foreign investors possibilities to finance and manage production out of the local market. This makes it possible for investors to manage the FDI projects with less risks of failure. Thus, the fourth hypothesis regarding economic openness is formed as follow:
Hypothesis 4: economic openness is positively related to US FDI outflows towards it. (3) Natural resources
Natural resources sometimes can attract huge amount of FDI for the host country, even in very close countries. Acquiring and securing a continual supply of natural resources is one of the major motives for FDI activity (Dunning, 1993). It is the central argument for backward vertical FDI. The objective for resource-seeking FDI is to provide inputs to downstream operations of the investing firms (Kang & Jiang,2012). But research by World Wildlife Fund (WWF) also reveals that, in a lot of cases, there is a high negative correlation between environment and FDI, especially in sectors such as mining and other natural resource based sectors that form a major proportion of investment flows to under developed countries. Due to the special property of natural resources, some of which cannot be reproduced in a short term, certain host countries with high natural resources rents will attract much more US FDI outflows regardless of the FDI environment there. The FDI projects into such countries are aiming at the natural resources. Risks, costs or other general rules do not work for such cases.
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3. Conceptual model
Based on the basic logic line of this paper, a conceptual model is formulated to illustrate the relationship between each factors of host openness and the FDI outflows.
Graph 1.
In the model presented above, in graph 1, the main theoretic framework of this research is showed. The square above refers to the host country openness, which is divided into cultural openness (CO) and economic openness (EO). They both have positive effects on FDI outflows in general. Cultural openness here contains three cultural dimensions: individualism, uncertainty avoidance and power distance. The relationship between these three cultural factors and FDI outflows can be tell from the positive/negative sign next to them. Both cultural openness and economic openness can influence the FDI outflows. Data are collected to test the conceptual model presented here.
Overall, the above discussion suggests modeling FDI as
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where outflow is the annual US FDI outflows to a certain host country; IDV is the individualism score; UAI is the uncertainty avoidance index; PDI is the power distance index; EO is the economic openness, measured by annual trade to GDP in the selected countries; TNRR is the annual total natural resources rents.. Natural resources may have influence on certain host country’s FDI attractiveness. Thus it’s included as a control variable to test if this influence is significant enough to have effects on the US FDI outflows of the sample host countries.
4. Methodology
This research use detailed panel data on FDI outflows from 20 different host countries in Europe from 2000 to 2010. Panel data sets, according to Hsiao (2003) and Plasmans (2006), allow for several advantages including the use of three estimation procedures, such as fixed-effects (FE), and random fixed-effects (RE) estimations. The FE estimations can be applied when the country heterogeneity is unobservable. Nevertheless, the use of a fixed effects model will eliminate the time-invariant variables IDV, UAI, PDI which are considered to be an important factor influencing FDI, and will make FE estimations less efficient than the RE estimation counterpart. Like in the FE model, in RE estimations, the unobservable country heterogeneity effects are taken into consideration, but these effects are incorporated into the error terms, which are assumed to be uncorrelated with the explanatory variables. One model against another will be tested using appropriate testing techniques for a panel data set (Cuyvers et al., 2011). In this research, a Hausman test will be introduced to help decide the model type in the final tests.
Sample (country selection)
United States has been chosen as the home country of FID flows, because it had the most FDI activities outwards according to a 2008 survey. In this case, it is chosen as the home country in all FDI projects. Thus the concept “foreign investors” in question refers to the American investors. The data of these FDI projects is obtained from the database of Bureau of Economic Analysis, U.S. Department of Commerce.
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Denmark, Portugal, Turkey, Belgium, Greece, Poland, and Ireland.
The author selected cross-national data on annual US FDI outflows to different host countries in total and analyzed it from 2001 to 2010. The US FDI outflows data are obtained from Database of Bureau of Economic Analysis, U.S. Department of Commerce.
Dependent variable
US FDI outflows per country (outflow)
In this study, the dependent variable will be the annual US FDI outflows by country, corrected for inflation. Data of constant dollar are used to rule out the inflation error.
US FDI outflows per country as the percentage of total US FDI outflows (outflow_P)
To include the percentage of US FDI outflows per country as the percentage of total US FDI outflows can give us a comprehensive version of the FDI outflows distribution to the selected host countries. Use outflow_P as a dependent variable may enable us to know if the structure of FDI activities also changed as the change of host country openness.
Independent variables Cultural factors:
Individualism score (IDV)
Uncertainty avoidance index (UAI) Power distance index (PDI)
Economic openness (EO):
The paper measured economic openness by annual Trade as percentage of GDP
Control variables:
TNRR: annual natural resources rents as percentage of GDP Data sources:
The World Bank Database OECD Statistics database
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5. Results
4.1 Descriptive statistics
Table 1 shows the basic descriptive statistics result of all the variables. In the table, we can notice that the TNRR value distributes closely at a low level.
Table 1.
Variable Obs Mean Std. Dev. Min Max
country 220 10.5 5.779431 1 20 year 220 2005 3.169489 2000 2010 IDV 220 63.65 15.80071 27 89 UAI 220 67.1 25.12288 23 112 PDI 220 43.8 16.92816 11 68 EO 220 86.85597 35.22813 43.19215 183.0696 TNRR 220 1.686027 3.793204 0.02492 21.62809 outflow_P 220 2.289136 15.3221 -125.473 88.20353 outflow 219 5840.631 11890.11 -19284 102709.9
The normality test for FDI outflows and the FDI outflow percentage are also conducted to check the normality of the 2 dependent variables. The result is that they not normally distributed. The p-value of VIF test is 0, less than 0.05, and then the null hypothesis that the data are normally distributed is rejected. Data on all the independent variables show no multicollinearity. The data shows heteroscedasticity and has been applied correction. No autocorrelation has been detected in the test.
To estimate, I run the OLS regression with several different models. The results can be found in table 2. From the table, we can tell that the TNRR alone does not have significant relationship with FDI outflows. Though it can fit in the model and affect FDI outflows together with other variables, it does reduce the significance of the entire model. But the other variables all show relationship with FDI outflows empirically.
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rejected. Power distance has shown significant positive effects on the FDI outflows, which is contrary to the original hypothesis.
Then, the author run the fixed effect model and random effect model regression with independent variables IDV, UAI, PDI and EO, and dependent variable total US FDI outflows of all industries. The results are in table 3. In the fixed effect model estimation, the 3 cultural variables omitted because of collinearity. This is because that cultural factors do not change over our observation period, but varies cross countries. In the model with control variable TNRR in, the P value is 0.0932<0.1.
In the random effected estimation, the results from estimating Eq. (1) tells us that the original hypothesis of Eq. (1) is significant. In the model with TNRR, the P value is 0.0481<0.5. The original model is significant. But in the model without TNRR, the P value is 0.0291<0.5. Thus we can conclude that the four independent variables can explain the US FDI outflows. At the same time, we can know that TNRR are not a good explanatory variable as the other ones.
In table 2 and table 3, we can identify the relationship between the four explanatory variables and the FDI outflows. We can see that UAI has negative sign, which suggests the negative relationship between UAI and FDI outflows. The sign of other independent variables are all positive.
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Table 2.
Dependent Variable: outflow OLS OLS OLS OLS OLS OLS OLS
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Table 3.
Dependent Variable: outflow FE GLS GLS GLS GLS GLS GLS GLS
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Table 4.
Dependent Variable: outflow_P FE GLS OLS
(1) (2) (3) IDV 1.79 1.81* UAI -0.26 -0.26 PDI 0.86 0.86 EO 0.92 -1.06 -1.07 TRNN 0.12 0.27 0.27 observations 220 220 220 R-squared 0.0026 0.0366 0.0366 P 0.6355 0.1576 0.1541 Significance levels: * 0.05 < p < 0.10, ** 0.01< p < 0.05, *** p < 0.01.
The results of the regression using outflow percentage as dependent variable are in table 4. From the table, we can easily conclude that host country openness may not cause changes in FDI outflow structure. The regression results are insignificant. This may due to the constant cultural condition of these host countries. Changes may be able to observe in a longer period.
6. Discussion
This paper examines the European host countries environmental openness towards FDI. Based on the cost and trust theory framework, the author proposes 4 hypotheses, among which H3 is rejected and others are supported. This research paper used panel data for 2000 to 2010, for 17 industries in detail and 20 countries to identify the relationship between host country openness and foreign direct investment outflows. For the time period considered, host country openness is significantly related to the FDI outflows. Summaries of the most important findings are as follows.
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how openness can actually affect host country FDI environment and then affect the FDI outflows. My research links the cultural factors and FDI outflows based on the reasoning that the host openness may motivate FDI outflows.
(1) Cultural openness
We can tell, from the results of the tests above, that cultural openness has significant influence on FDI outflows. Former studies failed to take cultural factors into account when investigating FDI patterns. Both the cultural background of the foreign investors and the cultural environment of host country should be taken in serious consideration when studying FDI.
As explained above, culture can somehow affect people’s choice and may cause chain reaction in the investment activities. For instance, investing in a culturally open market, the foreign investors will face relatively lower risks of partner’s opportunistic behavior, such as default. Besides, cultural openness is believed to have influence on the host country FDI policy making. Local FDI political restrictiveness is another issue that slows down foreign investors to commit resources into the host country. Restrictiveness not only increases investors cost of investment, but also limits their ownership share and benefit of the investment projects. A host country with higher openness level has better attractiveness towards foreign capital and thus encourages FDI. Lots of the international economic alliances have rules for their member countries on the FDI openness, such as less limitation or lower tax rates. The results of this research confirm this expectation that culturally more open economy can attract more FDI outflows.
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outflows of each year. And it can account for parts of the FDI fluctuations. Yet cultural openness draws a line of the host country basic openness. This means that the fundamental openness of the host country is based on cultural openness level. It cannot be denied that economic openness and cultural openness have mutual interaction. The mechanism of this interaction is that economic openness reacts to the changes, and after certain time, cultural openness may react similarly. For example, a certain host country opens its economy because it joined WTO in year 2001. Consequently, its economic openness increase rapidly in 2002. But its cultural openness seems to have no change in 2002. However, the increasing open environment of this host country enables its people to engage in more global activities and deal with more foreign culture. Therefore, the change of its cultural openness may be observed decades later. In this paper, the author wants to tell the investors that current cultural openness level is sufficient in host country FDI environment estimation. Furthermore, this so called current cultural openness may still have effects on FDI for decades.
Secondly, this paper also makes a contribution to FDI research by identified the relationship between three cultural factors and foreign direct investment outflows respectively. In previous literature, these 3 cultural dimensions have been proved to have significant influences on openness. Nevertheless, the relationship has not been tested empirically. The results of my tests offer a better understanding on how these 3 cultural factors actually influence FDI outflows.
First of all, I found that the individualism level of the host country is positively related to FDI outflows. In another word, host countries with higher individualism score are more attractive to FDI flows. From a foreign investor’s perspective, individualistic local employees are easier to control, thus the cost of operating the projects is relatively lower, and the efficiency of local labor force to work under an alien culture may be higher. Anyway, this helps reduce the risk of invest in a foreign country. From local entrepreneurs or employees’ perspective, cultural environment that score high in individualism enable them to act freely. They can make the decision that is benefit for them without too much social pressure. People can accept foreign capital, brand or working style to be part of their lives. Thus, this individualism encourages the FDI outflow in the host country.
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dealing with unfamiliar culture. The consequences of attracting more foreign direct investment are somehow unknown in their mind. On the contrary, people who can bare more uncertainty welcome the foreign capital and the opportunities that created by FDI.
Finally, the relationship between power distance level of the host country and the FDI outflow is also revealed. However, I found opposite result to the original hypothesis. Countries score high in power distance are predicted to be unwilling to open their economy to uncertainty, because they are afraid of the risk of losing their current comfortable lives. But the results of the tests show that countries which score high in power distance have relatively more FDI outflows. The positive relationship uncovered here can be explained as follows.
The entire Europe is an important part of the global economy，host countries are already in this international economy environment for years before the observation period. People have better knowledge and some experience to deal with the risks that brought by foreign investment. Thus FDI cannot be considered as total strange business mode in sample countries during 2000 to 2010. Moreover, being engaged in the global economy, the existing risks are much higher than the risks of accepting FDI. Therefore, people would still choose to accept foreign capital and their business operating style. Another possible explanation is that the current life is not yet at the most comfortable situation for the host countries people. They are pursuing better opportunities and more benefits, which may be created by FDI projects. In order to develop and achieve economic growth, there is no reason for people to say no to opportunities. In conclusion, people now are educated to be more open with global economy and have the ability to discover the chances behind FDI. They are definitely more open regarding FDI, but not in maintaining their current power. Thus FDI are also encouraged even in host countries that score high in power distance.
(2)Economic openness
5 reasonable both in theory and in empirical test.
(3)Natural resources
The natural resource is used as a control variable in this paper. The amount of FDI that attract by natural resources can be showed in the data statistic description (table 1). From the original data, we can tell that the annual total natural resources rents as the percentage of GDP of our selected countries are very low. None of the selected countries is attracting FDI mainly by natural resources. This indicates that the FDI outflows of the host countries in our sample are not significantly influenced by natural resources. The result also suggests that in the countries which are not natural resource oriented, FDI outflows will not be affected by it. However, there are cases that host country natural resources are significantly influencing the FDI outflow. In those cases, the host countries may be resource oriented. The deeper investigation on this can be done by future researchers.
7. Conclusion
This paper has tested the relationship between 3 cultural dimensions, economic openness and FDI outflows. The test results confirm that host country openness has significant effects on FDI outflows. A major contribution made in this paper is that the effects caused by the three cultural factors have been tested empirically. Individualism level and the economic openness have been proved to be positively related to the FDI outflows. As expected, uncertainty avoidance level turns out to be negatively related to the FDI outflows. What has surprised us is that power distance score of the host country also has the positive effects on FDI outflows.
The author analyzes the FDI outflows by industry respectively as well. Empirical results suggest that FDI of manufacturing industry and non-bank holding companies have most significant relationship with the 4 explanatory factors in the research.
6 an easier target to work on.
8. Limitation
Restricted policy regarding FDI in the host country may also be part of the host country openness and somehow have effects on the FDI outflows. In this paper, due to data availability, host country restrictiveness on FDI is not included. I hope that future with available data can also test the influence of host country restrictiveness. Even though the restrict policy can be explained by the cultural openness, an empirical test of the real restrictiveness of sample countries can offer better understanding of the influence of host country openness.
7
Appendix
List of host countries in the sample:
2
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