Institutional Differences and the Direction of Bilateral Foreign Direct Investment Flows: Are South–South Flows Any Different than the Rest?

Abstract

We explore the asymmetric effects of institutional differences on bilateral foreign direct investment (FDI) flows conditional on countries' development levels, previous experiences of foreign investors and bilateral trade relations. The empirical results using bilateral FDI data from 134 countries during 1990–2009 suggest that institutional differences create entry barriers for foreign investors only in North–South and South–North directions, and more so for the former. Furthermore, Southern investors appear to have a comparative advantage in institutionally different developing countries. Finally, we find no evidence that investor experiences in other institutionally different countries or existing trade linkages negate the negative effect of institutional distance.