TITLE:
Planting the Flag: Why Institutional Void Entrepreneurship Can Foster Foreign Direct Investments Inflows
AUTHORS:
Leandro Simões Pongeluppe, Maria Sylvia Macchione Saes
KEYWORDS:
Institutions, Entrepreneurship, Latin America, Sub-Saharan Africa, Panel Data
JOURNAL NAME:
Modern Economy,
Vol.5 No.5,
May
23,
2014
ABSTRACT: The main
assumption of the New Institutional Economics (NIE) is that the better a
country establishes its institutional environment, guaranteeing safeguards for investments,
the more investments will occur in this state. Foreign Direct Investment (FDI)
inflow, for instance, depends not only on the institutional strength of the
host country, but also on the entrepreneurial decision of the investor; FDI
trends are derived from an entrepreneurial evaluation of institutional
conditions and the possible gains and risks of performing the investment. It is
therefore possible to consider “institutional void entrepreneurship,”
entrepreneurs who tend to invest in states with institutional voids in order to
gain extra rents by exploiting this institutional gap. Keeping this objective
in mind, the present research intends to evaluate which institutional domains
(legal, economic and politic) are more significant for FDI attraction. To this
end, we analyse two regions, Latin America and Sub-Saharan Africa, collecting
data on international organizations and executing ten econometric models, based
both on ordinary last squares regressions (OLS) and fixed- and random-effect
panel data. The results demonstrate that despite the importance of the
institutional environment, the property rights score (legal domain) is more
important than other domains. Moreover, in contrasting the two distinct
environments we found that the importance of property rights can be conflicting,
reinforcing the argument that institutional void entrepreneurship can flourish
in regions with poorer institutional safeguards.