Evidence for the Effect of Monitoring Costs on Foreign Direct Investment / Bruce A. Blonigen, Anca D. Cristea, Donghyun Lee.

Format:

Book

Author/Creator:

Blonigen, Bruce A.

Contributor:

National Bureau of Economic Research.

Cristea, Anca D.

Lee, Donghyun.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25933.

NBER working paper series no. w25933

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

A proposed reason for the significant inverse relationship between distance (both physical and cultural) and foreign direct investment is the increased costs for a parent firm to monitor an affiliate when there is greater distance between them. We provide the first direct test of this hypothesis using O*NET data on occupational skills to construct industry-level measures of the importance of monitoring-related skills. We then exploit this cross-industry variation to examine whether physical and cultural distances have a greater impact on cross-border M&A in industries where monitoring-related skills are more important. Using data on worldwide cross-border M&A activity from 1985 through 2014, we find significant evidence for the effect of monitoring costs on cross-border M&A activity. We also show that the relatively low importance of monitoring-related costs in manufacturing industries compared to those in other sectors is an important factor in explaining why cross-border M&A in manufacturing is so large despite its relatively small share of the modern economy.

Notes:

Print version record

June 2019.