The Effects of Host Country Governance on Long Term Investment by Foreign Owned Establishments

This paper investigates the relationship between the ‘time horizon’ of establishment level investments and governance in the context of Foreign Direct Investment. At the national level, the structure and flow pattern of FDI has been the subject of much research, partially due to the effects FDI may have on the host country. The duration of firm-level investments has been potentially linked to the nature of these effects. Furthermore, the governance of the host country has been connected to the overall level of FDI the country receives although the empirical results have been mixed. This paper uses micro-level datasets to estimate the possible effects of host country governance on specific long-term investments by establishments. Measures of long-term investment are used from the labor and capital input sides of production. The labor variable is a binary measure of firm provided training. The establishment’s capital-labor ratio serves as the capital variable for investment. Both country level measures of governance and the surveyed perceptions of establishments are used to provide a comprehensive description of governance. Additionally, the relationship between investment and the host country’s illiteracy rate is examined. The results of the probit and linear regression models yielded negative relationships between the measures of the governance and investment in almost all cases. The illiteracy rate was shown to have a strong negative relationship with training programs but a weaker positive relationship with capital-labor ratios. The conclusion of this paper provides a discussion of the results and their implications. * I would like to thank Tim Bresnahan, my advisor, for his incredible guidance throughout this endeavor. I would also like to thank Mary Hallward-Driemeier for her assistance with the data and Geoffrey Rothwell for his encouragement. Special thanks to my parents for all of their support.