| This thesis isolates legal measures of shareholder and creditor protection in an attempt to determine the specific institutional variables that drive investment decisions. Using multivariate regression analysis for a cross-section of approximately 50 countries, I regress stock measures of net foreign assets and gross foreign direct liabilities on two measures of legal investor protection while controlling for other proximate determinants of investment. Once one controls for other institutional, political and economic variables, measures of shareholder and creditor protection are statistically insignificant predictors of cross-country variation in stocks of foreign direct investment liabilities. Thus, management of legal investor protection alone does not appear to be a significant means for policymakers to attract foreign investment inflows. Instead, countries with low average tariff rates and strong institutions tend to possess higher levels of foreign direct investment liabilities. Countries with high stocks of net foreign assets offer robust financial markets, strong protection against the risk of expropriation, and a high level of creditor investor protection combined with a strong rule of law. Measures of economic stability, economic development and accounting opacity are incapable of accounting for international patterns in both foreign direct investment liabilities and net foreign assets in this sample. |
