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The trend of foreign direct investment movement under legal-families consideration

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posted on 2015-07-09, 09:07 authored by Oi Yan Kam
This thesis investigates the relationship between legal families and Foreign Direct Investment (FDI) in both developing and developed countries. Recent statistics report that developing countries absorb nearly half of the global FDI inflows and repeatedly generate record levels of FDI outflows in 2010 and 2011 (UNCTAD 2010 and 2011). This thesis finds empirical support for the hypothesis that ‘institutional quality’ matters, with the metrics developed for institutional quality influenced by the activities of the former colonial powers of the past, during the colonial era, and currently in the post-colonial period. During the colonial era, nearly all the major colonisers exploited benefits from most of their colonies, in particular in the regions of Latin America and sub-Saharan Africa. They had no intention to educate the inhabitants to become skillful workers, there was limited infrastructure to support communication and transport and there was an absence of the ‘rule of law’ to protect the investors’ property related assets. These countries had low development and thus became economically lagging. In the post-colonial period, the colonisers have maintained strong ties to the former colonies under a sense of on-going solidarity and responsibility, providing their corresponding ex-colonies with substantial support, often through economic subsidies. They also played an essential role in the colonies’ political and institutional reforms. A coding of legal and colonial history is developed by which all the nations are categorised in groups of ‘legal families’, a proxy variable representing the manner in which the colonial powers treated the colonies. A framework is provided which includes both ‘legal origins’ and ‘colonial powers’ as instrumental variables alongside other independent variables including non-legal institutional, economic and financial variables for the empirical analysis. Our regression analysis indicates an increasing trend of FDI flowing to the developing countries, particularly those in Latin America and the Caribbean. This suggests that the institutional quality is a likely determinant of FDI. It illustrates that once these nations are able to provide a solid grounding in education, improved infrastructure and a legal system which enforces the protection of the investors’ knowledge-based assets, then whilst formerly economically lagging, they will be able to attract foreign investment and catch up. The findings provide a possible explanation as regards the recent trend in FDI activities and give an indication as to future key FDI movements. The evidence from regression analysis further suggests that legal families as classified under Klerman et al. (2011) more fully explain the levels of FDI movements than methods of classification adopted under La Porta et al.’s (1997, 1998, 2008) legal origins theory.

History

Supervisor(s)

Haven, Emmanuel; Nolte, Sandra

Date of award

2015-06-05

Author affiliation

School of Management

Awarding institution

University of Leicester

Qualification level

  • Doctoral

Qualification name

  • PhD

Language

en

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