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Foreign Direct Investment vs. Foreign Portfolio Investment

Author

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  • Jun Wu

    (Savannah State University)

  • Shaomin Li

    (Old Dominion University)

  • David D. Selover

    (Old Dominion University)

Abstract

We examine the effect of a country’s governance environment on the foreign investment it attracts. We classify countries based on the dominant mode of governance into three types: (1) rule-based (strong public rule of law), (2) relation-based (weak rule of law and strong informal networks), and (3) family-based (absence of both public rules and informal networks). We then examine how different governance types affect foreign investment patterns among 45 countries. Our main argument is that the choice of investment—direct or portfolio—is influenced by the type of property protection associated with different governance modes. We find that rule-based countries attract the lowest amount of FDI relative to the total amount of foreign investment, and they have the largest stock market size relative to their economies. Our study contributes to the foreign investment literature by bringing the governance environment into the equation and more successfully explaining why some countries have relatively large foreign direct investment ratios and relatively small foreign portfolio investment ratios.

Suggested Citation

  • Jun Wu & Shaomin Li & David D. Selover, 2012. "Foreign Direct Investment vs. Foreign Portfolio Investment," Management International Review, Springer, vol. 52(5), pages 643-670, October.
    • Handle: RePEc:spr:manint:v:52:y:2012:i:5:d:10.1007_s11575-011-0121-0
    DOI: 10.1007/s11575-011-0121-0
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    2. Jasmine Mondolo, 2018. "How do informal institutions influence inward FDI? A systematic review," "Marco Fanno" Working Papers 0218, Dipartimento di Scienze Economiche "Marco Fanno".
    3. Min, Byung S. & Bowman, Robert G., 2015. "Corporate governance, regulation and foreign equity ownership: Lessons from Korea," Economic Modelling, Elsevier, vol. 47(C), pages 145-155.
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    6. Yunyi Hu & Haitao Yin & Jon J. Moon, 2022. "Environmental regulation and foreign investment: Evidence from China," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(4), pages 862-883, November.
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    8. Rama Krishna Reddy & Frances Fabian, 2020. "Information Asymmetry and Host Country Institutions in Cross-Border Acquisitions," Management International Review, Springer, vol. 60(6), pages 909-938, December.
    9. Tricia Mangal & Day-Yang Liu, 2020. "The impact of economic freedom on foreign portfolio investments: The case of the Caricom single market and economy," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 9(2), pages 213-222, March.
    10. Alon, Ilan & Elia, Stefano & Li, Shaomin, 2020. "Greenfield or M&A? An institutional and learning perspective on the establishment mode choice of Chinese outward investments," Journal of International Management, Elsevier, vol. 26(3).
    11. Samuel Kwaku Agyei & Nathaniel Kwapong Obuobi & Mohammed Zangina Isshaq & Mac Junior Abeka & John Gartchie Gatsi & Ebenezer Boateng & Emmanuel Kwakye Amoah, 2022. "Country-Level corporate governance and Foreign Portfolio Investments in Sub-Saharan Africa: The moderating role of institutional quality," Cogent Economics & Finance, Taylor & Francis Journals, vol. 10(1), pages 2106636-210, December.
    12. Immaculate Simiso Nxumalo & Patricia Lindelwa Makoni, 2021. "Analysis of International Capital Inflows and Institutional Quality in Emerging Markets," Economies, MDPI, vol. 9(4), pages 1-16, November.
    13. Sabahat Riaz & Mohamed Hisham Hanifa & Fauzi Zainir, 2021. "Does Foreign Institutional Equity Participation Instigate Sustainable Corporate Investment Efficiency? Evidence from Emerging Economies," Sustainability, MDPI, vol. 13(8), pages 1-17, April.
    14. Tom'av{s} Evan & Vladim'ir Hol'y, 2021. "Cultural Diversity and Its Impact on Governance," Papers 2112.11563, arXiv.org, revised May 2024.
    15. Tung Son Ha & Vu Tuan Chu & Mai Tuyet Thi Nguyen & Dung Hoai Thi Nguyen & Anh Ngoc Thi Nguyen, 2021. "The impact of Greenfield investment on domestic entrepreneurship," Journal of Innovation and Entrepreneurship, Springer, vol. 10(1), pages 1-16, December.
    16. G Shivagami & T Rajendra Prasad, 2021. "Efficacy of Foreign Direct Investment in India - An Evaluation," ComFin Research, Shanlax Journals, vol. 9(2), pages 38-46, April.
    17. Photis Lysandrou & Offiong Helen Solomon & Thomas Goda, 2016. "The Differential Impact of Public and Private Governance Institutions on the Different Modes of Foreign Investment," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(6), pages 729-746, November.
    18. Bazel-Shoham, Ofra & Lee, Sang Mook & Ahammad, Mohammad Faisal & Tarba, Shlomo Y. & Alon, Ilan, 2023. "IP protection and ownership in cross-border acquisitions," International Business Review, Elsevier, vol. 32(3).
    19. Magdalena Owczarczuk, 2013. "Property Rights As A Factor Of Foreign Direct Investment. The Case Of Poland," Oeconomia Copernicana, Institute of Economic Research, vol. 4(2), pages 97-116, June.

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