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Outward foreign direct investment as escape response to home country institutional constraints

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Abstract

In this perspective paper we argue that outward foreign direct investment (OFDI) undertaken as escape response to perceived misalignment between firm needs and home country institutional conditions represents an important but under-explored phenomenon in the international business (IB) literature. We propose that, in advanced industrialized nations, the extent of OFDI as escape is likely to rise with the extent of societal coordination in the political economy. Societal coordination is associated with relatively slower rates of institutional adjustment and thus with relatively greater prevalence of misalignments that may drive OFDI. We illustrate the face validity of our argument and lay out the implications for future research in IB.

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Notes

  1. These distributional consequences are partially related to market opening attendant to globalization, which tends to result in gains for mobile production factors and losses for immobile production factors (Frieden, 1991).

  2. In the advanced industrialized nations there are normally no restrictions on OFDI. Where such restrictions exist, OFDI could of course be illegal, and might be labeled as ‘capital flight’.

  3. This work is published as a Max Planck Institute for the Study of Societies Discussion Paper. According to the Institute, these papers ‘are refereed scholarly papers of the kind that are publishable in a peer-reviewed disciplinary journal. Their objective is to contribute to the cumulative improvement of theoretical knowledge.’ The paper is available for download at http://www.mpifg.de.

  4. Daniel Kahneman received the prize jointly with Vernon L. Smith. Kahneman's co-author, Amos Tversky, could not share the honor because of his untimely death in 1996.

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Acknowledgements

We thank Lorraine Eden for her patience and constructive editorial guidance, and the four anonymous reviewers for their insightful feedback. We are further grateful for comments on various versions of the paper received from Witold Henisz, Gordon Redding, Gabriel Szulanski, Douglas Webber, Eleanor Westney, and audience members at conferences including AIB, AOM, EGOS, the JIBS Frontiers Conference, and at faculty seminars at INSEAD and the INSEAD Euro-Asia and Comparative Research Center.

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  1. INSEAD, Singapore, Singapore

    Michael A Witt

  2. Fuqua School of Business, Duke University, Durham, USA

    Arie Y Lewin

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Correspondence to Michael A Witt.

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Accepted by Lorraine Eden, Departmental Editor, 11 March 2007. This paper has been with the author for three revisions.

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Witt, M., Lewin, A. Outward foreign direct investment as escape response to home country institutional constraints. J Int Bus Stud 38, 579–594 (2007). https://doi.org/10.1057/palgrave.jibs.8400285

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