Outward foreign direct investment as escape response to home country institutional constraints
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PERSPECTIVE
Outward foreign direct investment as escape response to home country institutional constraints Michael A Witt1 and Arie Y Lewin2 1 INSEAD, Singapore, Singapore; 2Fuqua School of Business, Duke University, Durham, USA
Correspondence: Michael A Witt, INSEAD, 1 Ayer Rajah Avenue, Singapore 138676, Singapore. Tel: þ 65 6799 5253; Fax: þ 65 6799 5399; E-mail: [email protected]
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. Journal of International Business Studies (2007) 38, 579–594. doi:10.1057/palgrave.jibs.8400285 Keywords: outward foreign direct investment; institutional change; varieties of capitalism; comparative business systems
Received: 25 October 2004 Revision 1: 10 May 2005 Revision 2: 2 August 2006 Revised: 10 December 2006 Accepted: 11 March 2007 Online publication date: 10 May 2007
Introduction In this perspective paper we seek to highlight the role of escape from perceived misalignments between firms’ needs and home country institutional environments in spurring outward foreign direct investment (OFDI). Escape from the home country through OFDI represents an important but under-explored phenomenon in the international business (IB) literature. We further propose that, in advanced industrialized nations, the relative prevalence of such misalignment, and therefore the extent of OFDI as an escape response, is directly related to the extent of societal coordination in the political economy of the home country. In developing our argument, we draw on insights from a variety of fields, including IB, organization science, comparative political economy, socioeconomics, and several strands of institutional theory. While the literature mentions the possibility of OFDI as an escape response from the home country environment, an extensive literature search suggests that this dynamic has received relatively little systematic exploration in the field of IB. Table 1 summarizes IB research that speaks to the issue of OFDI as escape response from the home country environment, augmented by a number of representative works in related disciplines such as political science and economics. The summary in Table 1 suggests that rigorous conceptual and empirical treatment of OFDI as an escape response from the home country has
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