Giuseppina Maria Chiara Talamo
Foreign Direct Investments, Corporate Governance and Mode of Entry

Abstract:This paper estimates the determinants of foreign direct investment flows using the gravity equation, controlling for the importance of both the traditional gravity variables (size, level of development, distance, common language) and other institutional variables such as shareholder protection (developed by Pagano and Volpin, 2004 on an expansion of La Porta et al.,1998) and openness to FDI flows (Shatz, 2000). The purpose of this research is to identify the factors determining the decision of multinational firms to establish new foreign affiliates abroad. Empirical results seem to validate the hypothesis that less open countries are characterised by stronger ownership restrictions and a weak corporate governance mechanism. Additionally, our results suggest that foreign firms are more likely to establish joint ventures with domestic investors when these impose ownership restrictions, higher barrier to entry and at the same time can provide information about and access to local distribution channels. This mode of entry characterises, for example, less developed countries which present all of the above mentioned characteristics. On the contrary, less restrictions and protection of investors facilitates FDI flows and positively influences business attitudes. Open market and investment regimes are particularly powerful instruments to attract investment in general and FDI in particular.

JEL: F2, F4, G3,R3.
Keywords: foreign direct investment firm location, corporate governance.



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