Foreign direct investment by U.S. MNCs: Economic, political, demographic determinants

This study examines the effect of governance institutions of the host country on U.S. manufacturing FDI. In recent, importance of quality of governance institutions of the host country has been increased in attracting FDI. Previous studies evaluating the impact of governance institutions on FDI have been inconclusive, yet governance institution still plays in attracting FDI without providing foreign firms with any incentives. This research addresses a central question: Is the quality of governance institutions effective in attracting U.S. manufacturing FDI? This central research question is again investigated by using different sample groups such as developed and developing countries. Furthermore, the central research question is investigated for different types of FDI such as market seeking and efficiency seeking FDI. In particular, in examining the effect of quality of governance institutions on both market seeking and efficiency seeking FDI, this study assumes that different characteristics of the two FDI types might condition the effect of governance institutions on U.S. FDI. In this study, FDI data are computed within a three-years moving average framework (the average of the present year and the two preceding years) to solve the missing data problem. Research findings show that quality of governance institutions has the positive effect on U.S. manufacturing FDI as a whole, when controlling for economic and geographical factors. Also, the positive effect of governance institutions is found in using developing countries and efficiency seeking FDI, but not in using developed countries and market seeking FDI.