UNDERSTANDING THE ROLE OF NATIONAL FORMAL AND INFORMAL INSTITUTIONS IN ATTRACTING FDI

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1 - MASTER THESIS IB&M -

UNDERSTANDING THE ROLE OF NATIONAL FORMAL

AND INFORMAL INSTITUTIONS IN ATTRACTING FDI

Maurits van der Wijk (S1405403) University of Groningen

Faculty of Management & Organization The Netherlands

m.van.der.wijk@student.rug.nl

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2

ABSTRACT

Several studies confirm the positive influence of national formal institutions, expressed by the governance environment (such as the rule of law, press freedom and administrative policies) of a country, on the attraction of foreign direct investment (FDI). A recent study claims that a weak governance environment does not deter the attraction of FDI, since it can be substituted for by strong informal institutions.

We oppose several models including the formal institutions and the informal institutions point of view against each other, thereby adding a new measurement for informal institutions. Our empirical tests support the positive influence of national formal institutions, translated by the governance environment, on the attraction of FDI. We find no statistical evidence that support the argument of informal institutions as determinant for FDI.

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3

INTRODUCTION

International business literature has recognized the importance of country-specific differences in political and institutional factors as determinants of FDI flows (Kaufmann et. al., 1999, 2002; Gastanaga, Nugent & Pashamova, 1998; Wei, 2000). Recent empirical evidence indicates that a beneficial governance environment; including an effective, impartial and transparent legal system that protects property and individual rights, stable public institutions and government policies that favour free and open markets, is vital in attracting FDI (Globerman & Shapiro, 2003; La Porta et al., 1998; Pagano and Volpin, 2004; Gropp and Kostial, 2001; Shatz, 2001).

The governance environment of a country can be described as the public institutions and policies created by governments as a framework for economic, legal, and social relations (Globerman & Shapiro, 2003).

However, how can the large inflow of FDI in countries such as China and Russia be explained? According to the aforementioned perspectives these are countries that have weak formal institutions.

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5 institutions. According to Li (2004), the governance environment that lacks strong formal institutions has not been sufficiently examined. He empirically shows, by computing a governance environment index (GEI) that countries with a weak governance environment are not necessarily unattractive for FDI. Li (2004) explains this by making a distinction between rule-based countries and relation-based countries. Rule-based countries are countries in which investments are protected by strong formal institutions, whereas relation based countries are countries in which investments are protected by strong informal institutions. Hereby, you can think of private means to protect property as personal contacts with authorities or relying on inside information on prospective business partners.

Accordingly, we can observe two distinctive opposite perspectives; the formal institutions perspective emphasizing the important role of formal institutions in attracting FDI, and the governance environment index (GEI) perspective of Li (2004) advocating the role of informal institutions in attracting FDI.

Nevertheless, even though both, the GEI perspective and the formal institutions perspective, use different measurements to proximate the governance environment of a country, both perspectives estimate the governance environment of a country based on data on formal institutions. So we can ask ourselves whether Li (2004) uses the right proxy for national informal institutions*.

In this paper we will integrate alternative theoretical backgrounds: corporate tax (Gropp and Kostial, 2001), shareholder protection (La Porta, 1998; Pagano and Volpin, 2004) and administrative openness (Shatz, 2001; Markusen and Maskus, 1999) theories. We will integrate these perspectives according to their common emphasis on the positive impact of formal institutions on the attraction of FDI. In order to indicate the common emphasis on formal institutions we will refer to these perspectives as the formal institutions perspective.

*_{Li (2004), also uses data on public trust, thereby indicating the role of informal institutions, to compute his governance}

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6 Furthermore, we will add the ‘Cultural Index’, originally developed by Tabellini (2005), to the GEI perspective of Li (2004) as a new proxy for informal institutions.

Our particular interest goes to understanding the role of national formal and informal institutions in the process of attracting FDI. We elaborate on the GEI perspective of Li (2004) by introducing a more appropriate measurement for informal institutions. We will make use of the Cultural Index, consisting of measures on trust, developed by Tabellini (2005) to proximate the informal institutions of a country.

In this paper we will research the relationship between national formal and informal institutions and the attraction of FDI. We will do so by testing the alternative perspectives for a set of 48 developed and developing countries around the world. First, we will oppose the GEI perspective versus the conventional perspective. Second, we will add a more appropriate measurement for national informal institutions to the GEI perspective and test it empirically. Finally, we will determine which of the aforementioned perspectives has the best explanatory power for the attraction of FDI.

We aim to make the following contributions to the literature on the governance environment as a determinant of FDI. First, by opposing the GEI perspective versus the formal institutions perspective, we will be able to determine which perspective works best in explaining the attraction of FDI. Second, by adding a proximate for informal institutions in our analysis, we will be able to extend the study of Li (2004) by determining the importance of informal institutions in the process of attracting FDI. Third, we will be able to research the validity of the GEI perspective by empirically testing the influence of informal institutions on the attraction of FDI.

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7 section two and three we will discuss the GEI perspective advocated by Li (2004) by adding the concept of informal institutions. Furthermore, we will explain our methods of analysis in section four, followed by the results and discussion in section vife and six. Finally, section seven concludes.

THEORETICAL ORIENTATION

The macro environment of a country, often described as the governance environment, is defined as the public institutions and policies created by governments as a framework for economic, legal, and social relations (Globerman and Shapiro, 2003). In recent years scholars have spend increasingly more attention to the governance environment of societies and its effect on investment. There has been a large literature investigating the effect of a nation’s governance environment on investor’s willingness to invest and how investments are protected (Globerman and Shapiro, 2003; La Porta et al., 1998; Kaufmann et al., 2002; English and Moore, 2002).

Before entering the discussion on the impact of a nation’s governance environment on the attraction of FDI, we will provide a clear understanding of the concept of FDI. Investment can be divided into direct investment (FDI) and indirect or portfolio investment (FII). In the case of a direct investment the investor also participates in the management of the firm. Indirect investment refers to the purchase of securities as stocks and bonds (Li, 1999). The investor does not participate in the management of the firm. However the line between both kinds of investment is rather vague; when an investor owns 10 percent or more of the shares of a company it is considered to be a direct investment (Ball, et. al, 2002). The difference between both kinds of investment is therefore explained by control.

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8 2003, World Bank, 2000, Alesina and Dollar, 2000) conclude that the quality of domestic governance has a quantitatively important impact on a country’s ability to attract FDI.

I. The formal institutions perspective

We distinguish three different perspectives highlighting the positive impact of a nation’s governance environment on the attraction of FDI; shareholder protection perspective (La Porta, 1998; Pagano and Volpin, 2004), corporate tax perspective (Gropp and Kostial, 2001) and administrative openness perspective (Shatz, 2001; Markusen and Maskus, 1999). Although arguing from different perspectives, all three perspectives stress the importance of formal institutions in attracting FDI. We will therefore refer to these three perspectives as the formal institutions perspective as opposed to the new perspective, which we will discuss later.

First, the shareholder protection perspective holds that countries with a strong law system, meaning independent judiciary and legislation and fair and transparent laws with strong enforcement are more favorable to FDI(La Porta et al., 1998). La Porta et al. (1998), state that there is a strong relationship between corporate governance and the attraction of FDI by a country. La Porta et al., (1998) examine the legal rules that cover and protect corporate shareholders and creditors, the origin of these rules and the quality of enforcement in 49 countries. They divide the legal system of a country into Common Law and Civil Law (French Civil Law, German Law and Scandinavian Law). La Porta (1998) shows that Common Law has the strongest and French Civil Law the weakest legal protection of investors. Scandinavian and German Law are somewhere in between.

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9 non-transparent markets, ineffective governments and a legal system that is not rooted in English Common Law. The second stage is about analyzing those countries that did receive FDI flows. Results indicate that a governance environment, including the nature of the legal system is an important factor for the amount of FDI received.

La Porta (1998) and Globerman and Shapiro (2003) underline the link between national legal origin and protection of shareholders. However, Pagano and Volpin (2004) argue that there is no clear theoretical explanation for the observation that noncontrolling shareholders enjoy better protection in common law countries. Moreover, the approach of La Porta (1998) and Globerman and Shapiro implies that investors in civil law countries are doomed with weak protection. This does not correspond with recent developments in relation to regulation and the development of stock markets (Pagano and Volpin, 2004). In contrast, Pagano and Volpin (2004) focus on the political determinants of shareholder protection. According to their approach a distinction can be made between a proportional voting system and a majoritarian voting system. A proportional voting system focuses on social groups, while a majoritarian voting system focuses on districts. Using a panel of 45 countries, Pagano and Volpin (2004) find that under a proportional voting system shareholders enjoy weak protection of rights, and under a majoritarian voting system investors enjoy strong protection of rights.

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10 panel of OECD countries. However, the link between corporate tax rates and the attraction of FDI might not be as evident when taking into account a possible correlation between tax rates and other underlying characteristics that make a country favorable to FDI (Gropp and Kostial, 2001).

Hines (1999) found that international taxation significantly influences the behavior of multinational corporations. Hines (1999) provides evidence indicating that national differences in relation to the corporate tax rates influences the location decisions of multinational corporations and is responsible for a wide range of tax avoidance activities. Hines (1999) argues that governments seeking adequate tax revenue and efficient economic performance should impose lower taxes on FDI. Hines (1999) suggests implementing policies that will encourage foreign investors to report income locally instead of shifting income away to other locations. Examples of such policies include maintaining tax rates slightly below these of major trading partners and offering taxation advantages that are deductible in foreign jurisdictions (such as royalties and interests) (Hines (1999).

However, critics of the taxation perspective (Vogiatzoglou, 2006; Fujita, Krugman, and Venables, 1999) argue that the effect of national differences with respect to the corporate tax rate on the location of FDI flows is overstated. Proponents of the New Economic Geography (NEG) literature (Baldwin and Krugman, 2004; Andersson and Forslid, 1999) argue that there are other factors (such as the degree of the country’s peripherality and the degree of access and integration with international markets) at play determining the investment decisions of companies. According to these authors it is not necessary for governments to compete for FDI flows by offering the lowest level of corporate tax rates.

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11 importance of a country’s openness to FDI in attracting international investors. Shatz (2001) hereby researches a country’s public policies with regard to multinational corporations. The openness to FDI of a country is computed by an index consisting of three components. The first component rates a country on the simplicity of its approval process, the ability of foreigners to invest in a wide variety of sectors, and the level of ownership foreigners may take. The second component rates a country on the ability of foreigners to acquire domestically owned firms. The final component rates a country on the freedom to remit profits and repatriate capital (Shatz, 2001). Using a data panel of 57 countries, results show that a country’s openness to FDI is a major determinant of FDI flows.

Markusen and Maskus (1999) examined the influence of certain host country characteristics on the attraction of FDI. They found that multinationals with both local sales and export sales in their respective host country, are very sensitive to a host-country’s investment barrier (administrative costs related to FDI). Markusen and Maskus (1999) conclude that multinationals that bear high local trade and investment costs in one country, will be induced to look elsewhere.

So far we have discussed the formal institutions perspective relating a nation’s governance environment to the attraction of FDI. Taking into account different aspects of a nation’s governance environment, the overall conclusion seems to be that the quality of the formal institutions is decisive for the attraction of FDI (La Porta, 1998; Shatz, 2001; Markusen and Maskus, 1999; Hines, 1999; Pagano and Volpin, 2004). However, Li (2004) supports a different perspective.

II. The GEI perspective

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13 with “insiders” (government officials) are very common in these societies. In many relation-based societies these “insiders” are being bribed. Corruption is therefore an indication for a poor governance environment (Kaufmann, et. al., 1999 and 2002; Globerman and Shapiro, 2003).

When the law system fails to protect one’s property the use of these informal relations is into place (Li, 2003). This means that a lack of strong formal institutions can be substituted for by the presence of strong informal institutions. Li (2004) argues that most of the research on FDI flows has been conducted in the field of rule-based environments, thereby neglecting the important role that relation-based environments could play.

However, while both the formal institutions perspective and the GEI perspective differ from each other in the way they measure the governance environment of a country, they both use data on formal institutions to proximate it. We argue that relation-based societies should be approximated by measures of informal institutions. But what exactly is meant by informal institutions?

III. Informal institutions

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14 to private networks. In the research field the concept of informal institutions is a bit neglected, mainly due to the fact that these informal institutions are hard to measure. How do you measure the implicit codes of behaviour and norms of conduct?

Tabellini (2005) constructed an index to conceptualize informal institutions thereby incorporating the literature on social capital. Tabellini, 2005 argues that informal institutions can be proxied by measures of trust. For example, business is likely to be done on the basis of a handshake in a high-trust environment. Likewise, norms governing the use of a common pool resource are likely to be more effective in a high-trust environment. Tabellini, 2005 also argues that people who resort to informal institutions are people who believe they have large control over their lives. If people believe that what happens to them is largely the result of fate, they will be less likely to devise informal institutional arrangements to better their economic lot. Hence, informal institutions can be approximated by variables as trust and control (Tabellini, 2005).

By opposing the formal institutions perspective versus the GEI perspective we attempt to test them empirically and give a more appropriate explanation on the role of country’s specific formal and informal institutions in attracting FDI. However, considering that both perspectives use only measures on formal institutions to explain the attraction of FDI, we will add a new proxy for informal institutions.

IV. DATA AND METHODS

Data

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15 (2006), and in order to complete and compute the different indexes, we consulted Li (2004), Pagano and Volpin (2004) and Tabellini (2005).

For some variables, data were available for the whole sample (FDI inflows, corporate tax, administrative openness, GEI-index Li (2004), population), but for others, (including energy per capita and human capital with 46 corresponding values, Tabellini’s cultural index with 45 corresponding values and the shareholder protection index of Pagano and Volpin (2005) corresponding to 34 values) only for a limited sample.

Variables

Dependent variables

We measure the attraction of FDI by a country in two ways in order to oppose the formal institutions perspective against the GEI perspective through multiple angles.

FDI/FI: foreign direct investment flows related to the total foreign investment flows (sum of foreign direct investment and portfolio investment). The data are derived from International Financial Statistics (IMF, 2006) and World Investment Report (UNCTAD, 2006). FDI/GDP: foreign direct investment flows as a share of GDP. The data are derived from World Investment Report (UNCTAD, 2006) and the World Bank (2006).

Explanatory variables

The analysis will consist of three different explanatory variables; the formal institutions variable (FORMAL), computed out of three perspectives (corporate tax-, administrative openness- and shareholder protection perspective), the GEI variable (GEI), advocated by Li (2004) and the elaboration of the GEI perspective containing variables on informal institutions (INFORMAL).

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16 Based on the analysis of Gropp and Kostial (2001) we measure the corporate tax rate (CORP_TAX) through the so called World Tax Database that provides information on the level of corporate tax rate in a given country.

Following Markusen and Maskus (1999) we measure the administrative openness (ADMIN_OPEN) of a country using the IEF (Index of Economic Freedom) index. This index provides a ranking using a scale from 0 to 100, where 100 represents the maximum freedom. For instance, countries as Australia and Ireland with a score of 82.4 and 81.3 respectively, have a high administrative openness, while Russia and China with a score of both 54.0 have a very low administrative openness.

We measure the protection of shareholders (LLSV_NEW) through the so called LLSV-index (scaled/range 0-6), originally developed by La Porta et al. (1998), later updated by Pagano and Volpin (2005), indicating shareholders’ rights deficiencies in a given country. For instance, the UK and the USA have an anti-director index of 5, meaning they provide strong protection of shareholders, while Venezuela has an anti-director index of 1, meaning a very weak protection of shareholders.

GEI perspective (GEI)

Drawing on Li (2004), we measure the governance environment (GEI) of a country through the so called GEI-index (scaled/range 0-10), where 10 represents a very strong governance environment. The GEI-index uses data on five different dimensions; political rights, rule of law, level of corruption, level of public trust and free flow of information. Informal institutions (INFORMAL)

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17 Finally, we will use the level of human capital development to control for FDI inflows as a result of differences in skill development (UNDP, 2006). We use the level of human capital development as a control variable since its presumed to be among the key ingredients of inward FDI (Dunning, 1988; Lucas, 1990; and Zhang and Markusen, 1999).

======== TABLE 1 HERE =======

Methods

We use separate dependent variables in order to oppose the formal institutions perspective against the GEI perspective through multiple angles. In our first model we make use FDI/FI as dependent variable. We measure FDI as a share of total foreign investment (FDI/FI) to indicate the relative amount of FDI attracted by a country. By taking the relative amount of FDI as opposed to the actual amount of FDI, we are able to investigate the new perspective advocated by Li (2004); in countries with a weak governance environment the preferred entry mode is direct investment. The second model will use FDI/GDP as dependent variable. This allows us to control for the bias of size of each country.

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18 observations (47), we choose to use a summary variable (FORMAL) representing the formal institutions perspective (consisting of CORP_TAX, ADMIN_OPEN and LLSV_NEW) in our models. We computed the FORMAL variable as follows; first we rescale the variables (CORP_TAX, ADMIN_OPEN and LLSV_NEW) by dividing each value by its maximum value; second we take the average of the three variables. Important to note is that in contrast to the variables CORP_TAX and ADMIN_OPEN, the variable LLSV_NEW (shareholder protection) only has 34 corresponding values. We choose to neglect these missing values by filling in the average value of CORP_TAX and ADMIN_OPEN. We argue that since all three variables (CORP_TAX, ADMIN_OPEN and LLSV_NEW) are supposed to stress the positive link between formal institutions and the governance environment, the index will be a valid representation for the formal institutions perspective. However, we will leave room to experiment by allocating different weights to the variables (CORP_TAX, ADMIN_OPEN, LLSV_NEW) that form the index (FORMAL) (see appendix, table 9). Table 2 presents the results of the FORMAL computation.

====== TABLE 2 HERE ======

Second, we conducted a correlation test followed by a test for multicollinearity to check for interdependencies between the variables. Finally the strength of the results is tested by two regression tests; one using FDI as a share of FI as a dependent variable, and the other using FDI as a share of GDP.

When using FDI/FI as dependent variable, the linear regression has the following specification:

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19 Accordingly, when taking FDI/GDP as dependent variable:

FDI/GDP = βo+ β1*FORMAL + β2*GEI + β3*INFORMAL + β4*HUMAN_C + β5*[FORMAL*INFORMAL] + e

V. RESULTS

Table 3 depicts the descriptive statistics (mean and standard deviation) and correlations of the variables which assess the formal institutions perspective (CORP_TAX, ADMIN_OPEN, LLSV_NEW and the index FORMAL), GEI perspective (GEI), informal institutions index (INFORMAL) and the attraction of FDI per country (FDI/FI, FDI/GDP).

====== TABLE 3 HERE ======

First we examine the interdependencies between the variables in our model using the ratio of FDI to FI (FDI/FI) as dependent variable. The dependent variable FDI/FI correlates negatively to the formal institutions variable (FORMAL; significant at the 0.05 level), the GEI variable (GEI; significant at the 0.01 level), and the informal institutions index (INFORM; significant at the 0.01 level) and human capital development (HUMAN_C; significant at the 0.01 level). Our results indicate that there is a negative association between the strength of the institutional configuration of a country, including both formal- and informal institutions, and the relative amount of FDI attracted.

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20 using FDI/FI as dependent variable, here the results indicate that there is an association between the strength of a country’s institutions and its ability to attract FDI.

For further examination of the relationship between a country’s institutional configuration and its ability to attract FDI, we ran separate regression tests; one test using FDI as a share of FI (FDI/FI) as a dependent variable, and the other test using FDI as a share of GDP (FDI/GDP) as a dependent variable. Next to the regression tests, we conducted a VIF test to check again for the possibility of multicollinearity among the independent variables. In the model, using FDI/FI as dependent variable, we ran next to the linear regression test a Tobit regression test for more complete results.

======= TABLE 4, 5, 6 & 7 HERE ======

Results of the estimation for FDI/FI

The linear regression models, using FDI as a share of FI (FDI/FI) as dependent variable, confirm negative relationships between the institutional variables and human capital, and the amount of FDI attracted. However, among the institutional variables, only the formal institutions variable (FORMAL) is found to have a significant influence on FDI/FI (significant at the 0.05 level)†. The results also indicate a negative relationship between informal institutions (INFORM) and FDI/FI. Human capital development (HUMAN_C) is in all different models found to have a negative significant (significant at the 0.01 level) influence on FDI/FI.

The Tobit regression models confirm most of the findings of the linear regression models. Nevertheless, we also find a negative significant relationship (significant at the 0.10 level) between the interaction variable FORMAL*INFORM and FDI/FI. This means that our results

†

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21 do not support the argument of the GEI perspective, namely that a lack of strong formal institutions can be substituted for by the presence of strong informal institutions.

The results of our estimation, using FDI/FI as dependent variable, do indicate a significant (significant at the 0.05 level) negative relationship between the formal institutions of a country (FORMAL) and the amount of FDI attracted. These findings are in line with the GEI perspective advocated by Li (2004); countries that have a weak governance environment are not necessarily unattractive for FDI. Interesting to note is that the results in all different models also confirm a significant negative correlation between human capital development and FDI/FI. This is in contrast with several studies on the determinants of FDI, which presume human capital to be among the key ingredients of inward FDI (Dunning, 1988; Lucas, 1990; and Zhang and Markusen, 1999).

When looking at the explanatory capability of our models we find that the model including the formal institutions perspective variable (FORMAL) and human capital (HUMAN_C) explains best the relative amount of FDI attracted; 40.3 % of the variance is explained by the model (as indicated by the value of adjusted R²).

Results of the estimation for FDI/GDP

Our second linear regression model, using FDI as a share of GDP as dependent variable, shows positive relationships between a country’s institutional environment and human capital, and the amount of FDI attracted. However, among the institutional variables, only the GEI is found to have a significant influence (significant at the 0.10 level) on FDI/GDP. Model 1 shows that human capital development (HUMAN_C) has a significant positive influence on FDI/GDP. The Tobit regression is similar to the linear regression.

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22 human capital development in attracting FDI. However, the value of the adjusted R² (13.8%) of model 2 (including the GEI) indicates that the explanatory power of the model is limited. The results illustrate what we have pointed out before, namely that the GEI perspective is advocating the important role of informal institutions thereby relying on measurements of formal institutions to do so. Important to note is that the role of human capital is found to be of less significance than it was in the models that use FDI/FI as dependent variable.

VI. DISCUSSION

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23 relationship between the informal institutions of a country and the attraction of FDI. However, we did not find any evidence suggesting that a lack of formal institutions can be substituted for by the informal institutions in place.

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24 explained by the fact that foreign investment in developing countries focuses mainly on direct investment instead of indirect investment.

Our analysis on the influence of the governance environment on the attraction of FDI reveals several shortcomings to the GEI perspective of Li (2004). First, we find the claim that a poor governance environment does not deter FDI incorrect. Li (2004) seems to ignore the relative nature of the dependent variable FDI/FI; in countries with little foreign portfolio investment the share of FDI will naturally turn out to be large. Accordingly, in countries as the US and the UK, with large, highly liquid stock markets, the share of FDI/FI will turn out to be much lower. In addition, controlling for the bias of size of a country, we found that the quality of the governance environment does not deter FDI, but instead has a positive influence on the attraction of FDI. This again is in line with the formal institutions perspective; a beneficial governance environment is vital in attracting FDI (Globerman & Shapiro, 2003; La Porta et al., 1998; Pagano and Volpin, 2004; Gropp and Kostial, 2001; Shatz, 2001). Second, we found no evidence to support the claim that in countries with a poor governance environment informal institutions are important in attracting FDI. Li (2004) also does not provide any evidence to support his statement; in fact Li (2004) only refers to the observation that countries with a weak governance environment attract a relatively large amount of FDI.

VII. CONCLUSION

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25 research three main perspectives emerged; corporate tax perspective, administrative openness perspective and shareholder protection perspective. The corporate tax perspective proposes that international differences in the corporate tax rate account for considerable variances in the attraction of FDI, and can thus be seen as a major determinant of FDI flows. The administrative openness perspective claims that countries that are more open towards foreign investors, in terms of public policies with regard to multinational corporations, will attract significantly more FDI. And, finally, the shareholder protection perspective holds that countries with a strong law system, meaning independent judiciary and legislation and fair and transparent laws with strong enforcement are more favorable to FDI. Out of these three perspectives we composed a variable representing what we call the formal institutions perspective. Next to the formal institutions perspective, claiming the important role of formal institutions in attracting FDI, we identified the GEI perspective advocated by Li (2004). The GEI perspective states that countries that lack a good governance environment, meaning strong formal institutions, are not necessarily unattractive for FDI. Moreover, the GEI perspective argues that informal institutions could substitute for weak formal institutions in attracting FDI. However, we claim that the GEI perspective does not provide an appropriate measurement for informal institutions. We therefore introduced a new measurement for informal institutions in order to oppose the GEI perspective against the formal institutions perspective.

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26 found that the difference between the GEI perspective and the formal institutions perspective can be explained out of the choice for the dependent variable, either FDI/FI or FDI/GDP.

We have made the following contributions to the literature. First, we empirically proved that the assumptions of the GEI perspective on the positive role of informal institutions in attracting FDI are incorrect. Second, we found statistical support for the formal institutions perspective. Finally, we shed light on the relationship between the mode of investment (direct/indirect) and the recipient country.

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UNDERSTANDING THE ROLE OF NATIONAL FORMAL AND INFORMAL INSTITUTIONS IN ATTRACTING FDI