Contracting Institutions And Foreign Direct Investment: Evidence From The U.S. Mulitnationals

Abstract

Development Economics studies have highlighted the importance of both property rights and contracting institutions for attracting foreign direct investment. However, to the best of our knowledge, none of the previous studies has examined the separate FDI impacts of these institutions. Using country level data, this thesis examines the effects that both contracting and property rights institutions have on United States multinationals' foreign direct investment decisions. We control for potential endogeneity by using indigenous population density and country latitude, along with a British legal origin dummy variable as instruments for property rights and contracting institutions, respectively. We find strong evidence that weak contracting institutions are a deterrent to US firms' investment. We believe US multinationals place high importance on formal contracting institutions because of the quantity, size, and complexity of their transactions.