About the research
We investigate home bias in corporate decision making in an international context. There is a strong preference for corporate managers to invest in surrounding countries and places of social and cultural familiarity. We investigate whether this tendency to invest in the familiar is also present in foreign direct investments (FDIs). FDI data is on 5,755 different bilateral country pairs and more than 50,000 observations for FDI inflows and outflows for the period 1981-2005. Corporate investors prefer destinations that are more familiar to them. They prefer to invest in countries near to their home country and ones that are part of the same economic union as and have a similar legal system to the one in their home country. Like investors in the equity markets, the managers who make the decisions in the corporations regarding FDIs are people influenced by their personal background and their location.
Aims and objectives
The purpose of this research is to investigate familiarity bias in foreign direct investment (FDI). We expect that there is a strong preference for corporations to invest in surrounding countries and places of social and cultural familiarity. Corporate managers feel more familiar with countries with which they share a border, certain historical ties, or even a common past as parts of the same country in the past. Usually such historical ties lead to the existence of minority population which strengthens familiarity through a common language and culture. In addition to common languages, cultural familiarity is well approximated also by having same origin of the country’s legal system as well as being part of the same international economic or political unions.
Methodology
We estimate this general regression model:
FDI i,j,t = a + b1(Y1)i,t + b2(Y2)j,t + b3 (Y3)i,j,t + b4 (Y4)i,j,t + u
Where:
FDI i,j,t is FDI inflows or outflows
Y1 – macroeconomic variables (GDP, GDP per capita, GDP growth rate, population, country trade openness)
Y2 – is for geographic proximity (distances, shared border, same continent)
Y3 – familiarity variables (common language, shared legal system origin, economic/political union membership, colonial relationship).
Results
Corporate decisions regarding foreign direct investments are prone to bias. Our results show that foreign direct investors prefer to invest in countries that are geographically closer to their home countries. Physical proximity is an indicator of cultural and linguistic familiarity in most instances. Foreign direct investors also prefer to invest in countries whose economic and legal systems are similar to their own. Institutional similarities are important indicators of business climate familiarity.
Impact
Publications
Muradoglu, Y. G., Levis, M. and Vasileva, K. (2010) ‘”Near-home bias” in foreign direct investments’, Social Science Research Network. Retrieved 11 September 2013 from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1359168
Muradoglu, Y. G. and Vasileva, K. (2008) ‘Home bias in foreign direct investments’, poster prepared for the 4th ESDS International Annual Conference, London, 1 December 2008. Retrieved 11 September 2013 from https://ukdataservice.ac.uk/app/uploads/vasileva-poster.pdf