Risky Business: Institutions vs. Social Networks in FDI

Economics and Politics, Forthcoming

47 Pages Posted: 31 May 2012 Last revised: 26 Jan 2017

See all articles by Sonal S. Pandya

Sonal S. Pandya

University of Virginia

David A. Leblang

University of Virginia; University of Virginia - College of Arts and Sciences; University of Virginia - Woodrow Wilson Department of Politics; University of Virginia - Frank Batten School of Leadership and Public Policy

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2016

Abstract

Political economy accounts of economic integration strongly emphasize the importance of legal contract enforcement. We challenge extant research by showing that relational contracting, relationship-based contract enforcement, is more efficient for high-risk, human capital-intensive activities for which the costs of writing legally enforceable contracts are prohibitively high. We disaggregate foreign direct investment (FDI) into two distinct varieties: mergers and acquisitions (M&A) and venture capital (VC). We propose that VC flows are less sensitive to host institutions but correlate strongly with skilled migrant networks that monitor compliance and impose reputational costs. Our empirical analysis of dyadic VC and M&A flows covers over 100 countries during 1980-2009. We control for other mechanisms through which migrant networks facilitate FDI and verify our results with industry-level analyses. These findings suggest that relational contracting facilitates global integration of dynamic, knowledge-intensive industries even in the presence of weak institutions.

Keywords: foreign direct investment (FDI), political risk, migrant networks, venture capital

JEL Classification: F21, F22, F23, G24, G34

Suggested Citation

Pandya, Sonal S. and Leblang, David A., Risky Business: Institutions vs. Social Networks in FDI (November 1, 2016). Economics and Politics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1918360 or http://dx.doi.org/10.2139/ssrn.1918360

Sonal S. Pandya (Contact Author)

University of Virginia ( email )

PO Box 400787
University of Virginia
Charlottesville, VA 22904
United States

David A. Leblang

University of Virginia ( email )

PO Box 400787
University of Virginia
Charlottesville, VA 22904
United States

University of Virginia - College of Arts and Sciences ( email )

VA
United States

University of Virginia - Woodrow Wilson Department of Politics ( email )

PO Box 400787
University of Virginia
Charlottesville, VA 22904
United States

University of Virginia - Frank Batten School of Leadership and Public Policy ( email )

235 McCormick Rd.
P.O. Box 400893
Charlottesville, VA 22904-4893
United States

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