Risky Business: Institutions vs. Social Networks in FDI

27 Pages Posted: 9 Jun 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

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Date Written: July 2017

Abstract

Political economy scholarship on foreign direct investment (FDI) emphasizes variation in host country political risk but overlooks variation in investors' sensitivity to political risk. We show 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 prohibitive. We disaggregate 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 address other mechanisms through which migrant networks facilitate FDI and verify our results hold at the country‐industry level. These findings suggest that relational contracting facilitates global integration of dynamic, knowledge‐intensive industries even when formal institutions are weak.

Keywords: mergers and acquisitions, migrant networks, political risk, relational contracting, venture capital

Suggested Citation

Pandya, Sonal S. and Leblang, David A., Risky Business: Institutions vs. Social Networks in FDI (July 2017). Economics & Politics, Vol. 29, Issue 2, pp. 91-117, 2017, Available at SSRN: https://ssrn.com/abstract=2983483 or http://dx.doi.org/10.1111/ecpo.12088

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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