Elsevier

Journal of World Business

Volume 53, Issue 6, December 2018, Pages 835-849
Journal of World Business

Migrants and multinational firms: The role of institutional affinity and connectedness in FDI

https://doi.org/10.1016/j.jwb.2018.07.003Get rights and content

Abstract

We examine how, and to what extent, migrants in a host country attract foreign direct investment (FDI) from firms based in their country of origin (CO). Introducing the notion of institutional affinity, we argue that increased institutional affinity and increased connectedness of institutional environments of migrants’ CO and country of residence, make a location attractive to CO firms. Empirical analysis of FDI and migration panel data shows that in addition to the traditional factors influencing FDI patterns, there is a collective migrant effect on FDI, and this effect is statistically significant and economically meaningful for migrants from developing countries.

Introduction

The Department of Economic and Social Affairs at the United Nations estimates that 258 million people are living outside their country of birth worldwide as of 2017, up from 220 million in 2010 and 173 million in 2000 (UnitedNations, 2017). High-income countries host approximately two-thirds of all foreign-born population. As of 2017, 64% of all foreign-born population worldwide—165 million people—lived in high-income countries (UnitedNations, 2017). The increased number of migrants (aka persons born in one country, but living permanently in another) and non-immigrants (or transient migrants as we call them) in the firms of many developed countries have prompted scholars to examine the effect of migration on the cross-border firm activities at micro (Foley & Kerr, 2012; Hernandez, 2014; Kerr, 2008; Shukla & Cantwell, 2016; Zaheer, Lamin, & Subramani, 2009) and macro levels (Buch, Kleinert, & Toubal, 2006; Javorcik, Özden, Spatareanu, & Neagu, 2011; Kugler & Rapoport, 2005).

From a global strategy perspective, migrants can be assets for firms seeking to expand overseas, as their idiosyncratic knowledge and prior home country experience (Shukla & Cantwell, 2016) can reduce the need for learning through operational experience in a foreign location (Johanson & Vahlne, 1977). So far, studies that have specifically examined the migration-foreign direct investment (FDI) link have emphasized the knowledge carrier channel as the mechanism by which migrants influence FDI activities between their country of origin (CO) and country of residence (CR). This stream of literature has ignored the notion that over time migrants also bring about changes in the institutional environment of a location, which makes the location less foreign and more attractive for investing firms. Focusing on this locational aspect, in this study, we seek an answer to the following question—How and to what extent do foreign-born workers in a host country exert gravitational pull on the inward FDI activities of firms from their CO? We view the institutional environment as one that “includes political institutions such as the regime type, the national structure of policy-making and the judicial system, economic institutions such as the structure of the national factor markets and the terms of access to international factors of production and socio-cultural factors such as informal norms, customs, mores and religions” (Mudambi & Navarra, 2002), as well as the social, economic, educational, and legal organizations that are the creators and gatekeepers of institutions in the context of a country.

To seek an answer to our research question, we draw on North’s theory of institutional change (1990, 1991) and Granovetter’s notion of personal ties (1973, 1985) to propose a novel conceptual framework that provides a cohesive conceptualization of the migration –FDI relationship and elaborates on the mechanisms that influence this relationship. Using migrant roles as an anchor for this framework, we identify two roles: (1) Migrants as creators of institutional affinity; (2) Migrants as connectors of institutional environments. This conceptual framework lays the groundwork for our hypotheses. Our main argument is that in addition to the traditional determinants of FDI (geographic proximity, economic development, political stability, quality of formal institutions, government effectiveness, rule of law, and linguistic proximity) established in the extant international business (IB) literature, increased concentration of migrants, collectively through their interactions and exchange in the social and economic realm help in creating an institutional variety in a location, which makes the location relatively less foreign; we call this locational institutional effect: institutional affinity. Reduced foreignness through mechanisms of trust, bounded solidarity (Portes & Sensenbrenner, 1993), homophily (McPherson, Smith-Lovin, & Cook, 2001), familiar business practices and rules in the location and increased connectedness through knowledge flows, positively affects resource investment in that location by migrants’ CO firms. Thus, in this paper, we use a socio-economic lens to view the migration-FDI phenomenon. However, we do not lose sight of the fact that the firms we observe are for-profit firms and that they engage in FDI to create and capture wealth, whether the motive for FDI is to seek resources, markets, efficiency, knowledge, strategic assets or a combination of these.

We test the relationship between migration-related variables and inward FDI using panel data in the context of United States (U.S.) as the host country. To reduce endogeneity concerns, we use a deep lag of twelve years between prior migration variables and subsequent inward FDI stock. Therefore, we examine the effect of migration-related variables in 1980, 1990, and 2000 in the U.S. on FDI stock in 1992, 2002, and 2012 respectively. Our findings show that migrant-induced institutional change (in a developed host country) is a predictor of future inward FDI by firms from migrants’ CO into migrants’ CR for developing country migrants, thereby supporting our proposed hypotheses for institutional affinity, although only for developing countries. Our findings also reveal that the connectedness provided by migrants positively affects future inward FDI from migrants’ CO to their CR for both developed and developing countries.

These findings suggest the importance of migrants especially in the cross-border strategies of emerging market firms. Migrant communities in international locations can raise the attractiveness of the location and can help reduce its foreignness, thus providing locational advantages to developing country firms seeking growth through internationalization. These locational advantages arising from increased institutional diversity accrue in the form of access to human resources with a shared cultural heritage, which allows for more effective sharing, interpretation, and application of knowledge about business practices, regulations, financial resources, and business connections. Advantages also arise for expatriate managers and decision-makers of CO firms who come to view the regions as familiar (relative to other foreign locations) as these regions have more in common with their CO environment, in the form of access to relevant religious, cultural, and economic organizations.

This study has several implications for the IB literature, and in particular for the theories of FDI and the literature on the host-country institutional environment. First, it establishes the role of migrant-induced institutional affinity, resulting from increased concentration of migrants from a CO in a given geographic location, as a driver of FDI for firms from that CO. Second, the conceptual framework that we develop here links migration with FDI through institutional change, cross-border institutional connectedness, and the level of CO development. More importantly, we distinguish between migration-induced institutional variety in a host location and migrant-induced connectedness between the CO and CR. By proposing two distinct effects in this respect, which are supported by the data, our framework provides the foundation for future empirical research in this domain. Third, the notion of institutional affinity introduced in this study has implications for the literature on institutional distance, which focuses on the average distance between the institutional environments of countries. Institutional affinity, our interpretation, concerns a more focused effect within the distribution of institutional characteristics in a CR; we elaborate on this idea in the discussion section. Lastly, this study uses an original dataset and introduces some novel measures of migrant activity for the migration-FDI literature.

Section snippets

Migration and International Business: Taking Stock

Beginning with the seminal work of Hymer (1960), and the path-breaking work of scholars such as Caves (1971) and Dunning (1980, 1988), there is now a huge literature that examines the determinants and effects of FDI activities of multinational firms (Agarwal, 1980; Blomstrom, Kokko, & Globerman, 2001; Blonigen, 2005; Caves, 1996; Dunning, 1993; Ghemawat, 2001; Kim & Aguilera, 2016; Nielsen, Asmussen, & Weatherall, 2017). FDI determinants, broadly speaking, fall into four major groups—cultural

Theoretical framework and hypotheses development

To understand how the foreign-born population in a host country influences the FDI activities of CO multinational firms, we propose a role-based framework to explain the migration-FDI relationship. We identify two roles for the foreign-born persons: (1) as creators of institutional variety, and (2) as connectors of cross-border institutional environments, by virtue of which they can influence the investment activities of firms from their CO. As creators of institutional variety, migrants from a

Research setting

We study the migration-FDI phenomenon in the context of the U.S., which we chose for several reasons. First, it is an active host country from an FDI perspective. Second, 13 percent of its population is foreign-born (OECD, 2012). Third, according to the U.S. Census Bureau, 62 percent of the foreign-born population entered the country in 1990 or later (Grieco et al., 2012). Fourth, it is a net immigrant-receiving country; in 2001–2009, 9.5 million immigrated to the U.S., while 2.8 emigrated out

Conclusions and discussion

In this study, we argue that the external manifestation of migrant groups’ tacit knowledge in interactions and exchange in their CR brings about changes in the informal and formal institutional environment that introduces into the region elements somewhat more akin to migrants’ CO; the combined collective effect, which we call, institutional affinity, influences the investment strategies of firms from migrants’ CO as these firms view the region as more attractive and relatively less-foreign.

Acknowledgements

We thank the editor-in-chief Jonathan Doh and the three anonymous reviewers for their detailed, thorough, and invaluable feedback throughout the review process. We thank Roger Smeets, Mariana Spatareanu, and Ajai Gaur for their invaluable comments and suggestions on an earlier version of this paper. We thank Ram Mudambi and the participants at the PDW session – The movement of people across borders at the 2017 DRUID conference in New York for their feedback. Last but not least, we thank the

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