Culture Matters; Extending Dunning's Eclectic Paradigm to Unpack the Role of Culture as an Institutional Location Advantage and the Interplay with Formal Institutions
2 Pages Posted: 10 Sep 2024
Abstract
The impact of formal institutions on foreign direct investment (FDI) location choice has been thoroughly examined, yet the interplay between formal and informal institutions such as culture remains relatively unexplored. This paper analyses the direct effects of host country culture- a key institutional location advantage- on FDI and the moderating effect of formal institutions on this relationship. Our analysis of FDI flows in 60 countries over 15 years (2002-2016) shows that culture matters: individualism, uncertainty avoidance and indulgence, respectively, influence FDI positively, while power distance and long-term orientation affect FDI negatively. Contrary to our expectations, we find that strong formal institutions- captured by government effectiveness- strengthen the relationship between FDI and host country culture (i.e. power distance, individualism, uncertainty avoidance, long-term orientation and indulgence). We extend Dunning’s eclectic paradigm with insights from North’s institutional theory and Hofstede’s cultural dimensions and we draw implications for theory and practice.
Keywords: inward foreign direct investment, FDI, institutions, institutional theory, Hofstede's cultural dimensions, informal institutions, culture, the eclectic paradigm, the OLI
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