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Liability of Foreignness: Product Distance, Institutional Distance and FDI

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  • Alyson C. Ma
  • Ryan D. Ratcliff

Abstract

We empirically analyze the relevance of a country’s export mix in offsetting the liability of foreignness when internationalizing through foreign direct investment. Using a gravity model, we demonstrate that countries with a similar mix of exports will tend to have higher FDI flows between them, even when controlling for per-capita income. We also show that the inclusion of export mix reduces the estimated importance of institutional similarities. Lastly, we discuss which firm-level motivations for internationalization are most consistent with our country level evidence.

Suggested Citation

  • Alyson C. Ma & Ryan D. Ratcliff, 2020. "Liability of Foreignness: Product Distance, Institutional Distance and FDI," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 27(1), pages 93-110, January.
    • Handle: RePEc:taf:ijecbs:v:27:y:2020:i:1:p:93-110
    DOI: 10.1080/13571516.2019.1651152
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    Cited by:

    1. Jeong, Jaehoon & Yang, Jae-Suk, 2023. "Why do some firms stop exporting?," International Business Review, Elsevier, vol. 32(4).

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