Trust and foreign ownership: Evidence from intra‐European foreign direct investments

Abstract

We use a novel firm-level dataset to test whether trust affects the volume and the ownership structure of FDI across Europe. Our methodology deals with the endogeneity of trust from the investor to the recipient country. We expect such a trust measure to affect investment decisions, and the associated knowledge capital, differently across types of foreign investors. In particular, this effect is expected to be stronger for industrial investors who possess transferable knowledge capital. The data confirm our predictions. Higher trust increases the number and volume of FDIs, but also the probability of co-investing with a partner from the recipient country. |DA RIN et al. Hypothesis 2:The effect of origin-to-destination trust on the co-investment decision is ambiguous and depends on the trade-off between the direct negative effect of the reduction in cultural distance and the indirect positive effect that the reduction in cultural distance has on the risk of expropriation. This combined effect is expected to be heterogeneous across types of investors in the FDI companies since we expect the second effect to matter more for types of investors that have stronger technological and managerial capabilities.

The effects of competition policy, regulatory quality and trust on inward FDI in host countries

“…Both factors are expected to favour inward FDI. Trust helps reduce the probability of opportunistic behaviour and moral hazard, mitigates the inefficiencies associated with incomplete contractual relationships between FDI affiliate enterprises and domestic stakeholders, and facilitates the establishment of cooperative relations between the parties (Bhardwaj, Dietz & Beamish, 2007;Da Rin, Di Giacomo, & Sembenelli, 2019;Guiso, Sapienza, & Zingales, 2009;Zhao & Kim, 2011). A high-quality RIE involves policies designed to enable and promote business activities, including inward FDI (Bailey, 2018;Daude & Stein, 2007;Lu, et al, 2014;Nielsen et al, 2017).…”

The impact of brand familiarity, perceived trust and attitude on investors’ decision-making in Islamic stock market

“…Researchers have explored the positive implications of perceived trust on investment decisions and attitudes (Aziz et al, 2019;Bottazzi et al, 2016;Elliott et al, 2011;Rin et al, 2019). To illustrate, Bottazzi et al (2016) examined the effect of trust on institutional investors' investment decisions and found a significant relationship between trust and investment decisions.…”

“…In other words, the greater an investor's trust, the more likely they can decide to invest. Further, Rin et al (2019) proposed that greater trust increases the number and volume of investments. In contrast, a low level of perceived trust reduces the likelihood of buying stocks (Pareek and Zuckerman, 2014).…”

A Political Economy Perspective: Attracting Foreign Direct Investments into Sri Lanka and Vietnam

“…Other in-country alignments such as institutional frameworks and market factors are relevant to the destination’s capacity to attract FDI (Chen et al 2017 ). These alignments are essential in convincing foreign businesses to establish subsidiaries or other operations since changes in economic policy or instability in institutional policy frameworks, especially for a country emerging from a postconflict era, can have large impacts on both the structure and the size of FDIs (Da Rin et al 2019 ).…”