To the best of our knowledge, Javorcik (2004) is the only papers, which use firm-level data to analyse the role of institutional quality on an outward investor’s entry mode in transition countries. Our paper extends Javorcik (2004) in a number of ways: (a) rather than a cross-section, we use panel data for the period 1997-2006; (b) rather than a binary variable, we use the percentage foreign ownership as continuous variable; (c) we consider multi-dimensional institutional variables, such as corruption, intellectual property rights protection and government stability. We also use factor analysis to generate a composite index of institutional quality and see how stronger institutional environment could affect foreign ownership; (d) we explore how the distance between institutional environment in source and host countries affect foreign ownership in a host country.
The firm-level data used includes both domestic and foreign firms for the period 1997-2006 and is drawn from ORBIS, a commercially available dataset provided by Bureau van Dijk. In order to examine the link between institutions and foreign ownership structures, we estimate four log-linear ownership equations/specifications augmented by institutional and other control variables. We find evidence that the decision of a foreign firm to either locate its subsidiary or acquire an existing domestic firm depends not only on factor cost differences but also on differences in institutional environment between the host and source countries.
References Javorcik, B.S. (2004) ‘The Composition of Foreign Direct Investment and Protection of Intellectual Property Rights: Evidence from Transition Economies’, European Economic Review, 48(1), 39– 62.
Estrin, S and Bean, A. (2004) ‘The determinants of foreign direct investment into European transition economies’, Journal of Comparative Economics, 32 (4), 775-787.
Globerman, S. and Shapiro D. (2003), ‘Governance infrastructure and
Javorcik, B.S. (2004) ‘The Composition of Foreign Direct Investment and Protection of Intellectual Property Rights: Evidence from Transition Economies’, European Economic Review, 48(1), 39– 62.