Does quality of innovation, culture and governance drive FDI?: Evidence from emerging markets

    Does Quality of Innovation, Culture and Governance Drive FDI? : Evidence from Emerging Markets P.N. Kayalvizhi, M. Thenmozhi PII: DOI: Reference:

S1566-0141(17)30431-4 doi:10.1016/j.ememar.2017.11.007 EMEMAR 537

To appear in:

Emerging Markets Review

Received date: Accepted date:

27 October 2017 23 November 2017

Please cite this article as: Kayalvizhi, P.N., Thenmozhi, M., Does Quality of Innovation, Culture and Governance Drive FDI? : Evidence from Emerging Markets, Emerging Markets Review (2017), doi:10.1016/j.ememar.2017.11.007

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Does Quality of Innovation, Culture and Governance Drive FDI? : Evidence from Emerging Markets

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Kayalvizhi.P.Na , Thenmozhi.Mb,∗

Scholar, Indian Institute of Technology Madras, Chennai, Tamil Nadu, India-600036. Indian Institute of Technology Madras, Chennai, Tamil Nadu, India-600036.

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b Professor,

Abstract

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This study examines how technology, culture and corporate governance drive inward FDI in emerging economies. A study of 22 emerging economies shows that technology is the major attractive factor influencing inward FDI. Further, FDI increases as technology absorption and innovation capacity increase. The greater the quality of country governance, the greater the influence of corporate governance on FDI. Cultural dimensions such as individualism, masculinity and uncertainty avoidance exhibit a weaker influence on inward FDI, while power distance and indulgence have a stronger influence on inward FDI. Our results support the leapfrogging approach of emerging economies towards promoting innovation and enhancing technology adoption to drive FDI. Interaction effect of country governance further highlighted that better the governance of a country the impact of technology, innovation, corporate governance and culture in attracting inward FDI also increases.

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Keywords: FDI, Governance, Technology, Innovation, Culture JEL classifications: F23, O30, Z19, C23

1. Introduction

According to the UNCTAD global investment trends monitor report 2016, global FDI has risen by 36% in 20151 . Regardless of economic and financial crisis, emerging economies outperformed other economies mostly because of their sustainability even during the crisis period2 . Prior studies focused on the relationship between country-specific economic growth and the inflow of FDI and find that GDP growth (Awokuse and Yin (2010); Daniele and Marani (2011); Perez et al. (2012); Gomes Neto and Veiga (2013); Kudina and Pitelis (2014); Paniagua and ∗ Corresponding

author Email addresses: [email protected] (Kayalvizhi.P.N), [email protected] (Thenmozhi.M) *This paper was presented at the 2016 Cross Country Perspectives of Finance conferences held in Taiyuan and Puer, China. 1 unctad.org/en/PublicationsLibrary/webdiaeia2016d1 en.pdf 2 The global economic crisis and FDI flows to emerging markets: for the first time ever, emerging markets are this year set to attract more than half of global FDI flows by Laza Kekic; The Role of Emerging Markets in a New Global Partnership for Growth by IMF Managing Director Christine Lagarde By Christine Lagarde, Managing Director, International Monetary Fund University of Maryland, February 4, 2016

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Sapena (2014); Dreher et al. (2015)), inflation (Bengoa and Sanchez-Robles (2003); Li and Liu (2005); Busse and Hefeker (2007); Straub (2008); S´anchez-Mart´ın Miguel Eduardo et al. (2014)), and trade openness (Addison (2003); Ang (2008); Asiedu and Lien (2011); Blanc-Brude et al. (2014); Hsu and Tiao (2015)) impacts FDI inflow. However, macroeconomic factors fail to justify the increased flow of inward FDI to emerging economies and the primary focus of researchers has shifted to country governance factors (Gani (2007); Buchanan et al. (2012)). While better economic environment and country governance may induce more FDI, the distinctive factors that attract FDI in emerging economies is largely dependent on institutional environment. In the context of emerging economies, it is the institutional environment that determines the level of technological growth and innovation more than country governance. This distinction is crucial in the context of inward FDI. Firm level corporate governance and country culture may also play a significant role in the success of FDI investment. Hence, a plausible conjecture is that factors such as the ability to adopt technology, capacity of innovation, quality of corporate governance and dynamic cultural factors may be associated with a country’s competitiveness and increasing inflow of FDI in emerging economies. With technological developments, the capacity to sustain the benefits of FDI becomes easy. As a result, technology may be the important driving force of inward FDI in emerging economies since they benefit from technology transfers through FDI inflow (Borensztein et al. (1998)). A favourable investment environment for technology transfers positively influences FDI (Hsu and Tiao (2015)). This argument supports the leapfrogging technological growth pattern in emerging economies. In pursuance of advancement, emerging economies recognize the need to reduce the technology gap and stimulate innovative capacity. The ability to adopt technology and innovative capacity increases the capability to survive new challenges in the business environment. Moreover, the political connections of multinational enterprises that make investments influence the quality of investment in innovation (Cumming and Zhang (2016)) and increases the accessibility of foreign markets (Sojli and Tham (2017)). The extent to which the strength of the institutional environment enhances technology and innovation in emerging economies may be a key feature in attracting FDI. Therefore, the opportunities for growth from inward FDI in emerging economies may not be just a function of good country governance but may also depend on the level of technology adoption and the capacity for innovation. Emerging economies with identical economic and country governance structures fail to attract a similar level of inward FDI due to inefficient business environment. Emerging economies, which had hitherto been incompetent in governing countries, began to overcome their inefficiencies through improved firm-specific advantages. Along similar lines, a better corporate governance structure improves operating performance, which then increases financial performance and thereby partially compensates the weak support from the governments of emerging economies. The firm-level operating performance improves the efficiency of the business environment, and corporate governance practices in emerging economies strongly influence the operating environment (Klapper and Love (2004)). Thus, better corporate governance in the presence of better country governance may lead to a greater flow of inward FDI in emerging economies. Over the years, emerging economies have also witnessed a change in cultural preferences due to globalization. Firms under any situation do not work in isolation, and their performance is dependent on cultural adaptability. In this context, the challenge in investing in an economy with a high level of cultural difference magnifies uncertainty and risk. The cultural difference between the host and the home country significantly affects inward FDI (Liu et al. (1997)). The existence of high level of uncertainty and the risk level of culturally sensitive economies deter FDI flow, but economies with a specific cultural characteristic, such as uncertainty avoidance, 2

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prefer FDI investment (Bhardwaj et al. (2007)). Collectivism and the futuristic dimension of culture promotes regulatory, political and economic institutional factors (Holmes et al. (2013)). Therefore, emerging economies need to recognize the moderating effect of culture and adapt the values and belief system that best influence firm performance. Thus, the degree of inward FDI flow into emerging economies may also depend on the link between country governance with culture. Hence, this study starts from the premise that the influence of trade-linked technology, innovation, corporate governance and cultural factors are likely to be associated with inward FDI in emerging economies. We propose that the quality of country governance in an emerging economy would improve the investment environment and provide an additional effect in combination with the extent of technology, capacity for innovation, quality of corporate governance and adaptability of culture. We examine the interaction effect of country governance with technology, innovation, corporate governance and cultural factors to enhance FDI in emerging economies. The empirical results indicate that technology is the major attractive factor influencing inward FDI. Further, FDI increases as technology absorption and innovation capacity increase. Simultaneously, good corporate governance practices and cultural dimensions such as power distance and individualism also drive inward FDI. The interaction analysis also further highlight that better the governance of a country, the greater the impact of technology, innovation, corporate governance and culture in attracting inward FDI.

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2. Literature Review and hypotheses development

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Over the past decade, researchers and practitioners have examined the need for attracting FDI. Borensztein et al. (1998) estimate a relatively greater effect on economic growth from FDI than domestic investment. Prior studies that examine the link between macroeconomic factors and inward FDI find that it signals stability and sustainability in an economy (Addison (2003); Bevan and Estrin (2004); Alfaro et al. (2004); Li and Liu (2005); Awokuse and Yin (2010); Daniele and Marani (2011); Perez et al. (2012); Gomes Neto and Veiga (2013); Kudina and Pitelis (2014); Paniagua and Sapena (2014); Dreher et al. (2015); Hsu and Tiao (2015)). Further, success stories and failure of FDI in emerging economies have caused researchers to shift their attention towards the governance structure in an economy. Uncertainty in emerging economies has dealt with responsible governance practice, and country-level governance (Louie and Rousslang (2008)) factors such as political stability (Alfaro et al. (2004); Wei (2005); Slangen and Tulder, 2009; Peter and Wich (2012)) and corruption (Wei (2000); Habib and Zurawicki (2002); Cuervo-Cazurra (2008); Cole et al. (2009)) explicitly have drawn attention. Other institutional quality (Alfaro et al. (2008)) also affects inward FDI. Previous literature demonstrates mixed results on the relationship between country governance factors and FDI. Furthermore, we seek to find the effect of other influencing factors such as technology, innovation, corporate governance and culture in an emerging economy. 2.1. Technology, Innovation and Inward FDI It is evident that macroeconomic stability and good country governance (Gani (2007)) factors attract FDI to achieve steady growth. With respect to emerging economies better country governance and better macroeconomic environment do not assure a larger flow of FDI and they recognize the need to identify distinctive elements to attract and sustain FDI. Diffusion of technology across economies has fuelled a change in the business environment, and emerging economies 3

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attempt to progress in the direction of technology with an extensive focus on their technology readiness, adoption and quality of innovation that will lead to successful attraction of FDI. It is pertinent to examine if these factors drive FDI in emerging markets. Innovation transforms the economic growth of emerging economies. Innovative environment encourage competitiveness and steady growth. Instigating innovation through advanced technology is an essential factor to enable capital flows across economies. Patents registered by residents and non-residents, the protection of intellectual property rights and government spending on research and development measure innovation in an economy through technology. The flow of FDI into an economy depends on the effectiveness of the legal system and the protection of innovation. Yueh (2009) evaluated the implications of patent laws and intellectual property rights in China and showed that policies pertaining to FDI and research and development are positively related to innovation, as measured by the number of patents. Ushijima (2013) also proved the existence of a strong relationship between protection of patent rights and FDI inflow and showed that this association is intensive only in economies with sophisticated technology. However, strong patent protection laws reduce the risk associated with the spillover effects of an investor’s proprietary technology, implementing laws that strengthen the proprietary rights of foreign investors may increase the inflow of FDI. Although empirically it is found that technology attracts FDI, there is no evidence on the influence of the extent of readiness for technology on inward FDI. Thus, there is reason to focus on the ability of emerging economies to adapt and adopt technology. Moreover, the ability to exploit technology might plausibly increase the capacity to innovate in emerging economies, which could further increase the flow of FDI. Advancement in technology and the quality of innovation may probably be stimulated by the ability of an economy to change. Therefore, the level of inward FDI might increase with better country governance moderating the technological abilities and capacity for innovation in emerging economies. Hence, we hypothesize that technology adoption variables such as patents, intellectual property rights, technology absorption, technology readiness, research and development spending, the number of scientific articles published and high technology exports have an effect on inward FDI. Hypothesis 1. Greater adoption of technology and capacity for innovation leads to a greater flow of inward FDI in emerging economies. Moreover, good or poor country governance may enhance or reduce the effect of technology and innovation on inward FDI in emerging economies. Hence, we hypothesize the following: Hypothesis 2. When innovation interacts with country governance, there will be a higher probability of technological growth and a higher flow of inward FDI in emerging economies. 2.2. Corporate governance and Inward FDI Corporate governance measures the formal institutional structure in an economy and emerging economies try to overcome their country-level inefficiencies through improved firm-level attributes. Good corporate governance enables FDI (Choi et al. (2014)). From an investors perspective, when a firm is involved in international business activities, there is a significant effect of the firms corporate governance structure, as minority investors protection influences the inward flow of FDI (Choi et al. (2014)). Lien et al. (2005) investigated the significance of corporate governance factors of Taiwanese firms and found that the presence of institutional shareholders and a firms ownership structure determines the strategic decision of foreign firms to invest 4

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in China and other economies. Although empirical analysis confirm that corporate governance standards affect investment decisions, there continues to be conflict in the implementation of corporate governance standards in developing economies. Khanna et al. (2006) showed that although economies adopt corporate governance standards due to the globalization process, they have not implemented the standards in practice. The institutional environment in an economy moderates the investment decision, and a favourable investment environment in an emerging economy reduces its business risk and makes it an advantageous economy for export (Lu et al. (2009)). According to the OLI framework, the internalization advantages focus on firm-specific factors that have positive effects on decisions regarding FDI. Previous literature shows that firm size, operating efficiency and human capital have a significant influence on the flow of FDI, but there is no evidence explaining the relationship between an economy’s overall corporate governance standards and the inward flow of FDI. Since emerging economies are steadily progressing towards sustainability, it is important for them to improve their corporate standards and practices to meet the needs of institutional investors in order to facilitate inward FDI. Hence, we hypothesize that: Hypothesis 3. Better corporate governance standards increase the flow of inward FDI in emerging economies.

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The investing environment essentially requires a good country governance framework within which firms tend to reinforce their performance through better corporate governance. Therefore, country governance may moderate the effect of corporate governance to boost higher inward FDI. Hence, we hypothesize that:

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Hypothesis 4. Better corporate governance together with better country governance attracts more inward FDI in emerging economies. 2.3. Culture and Inward FDI Culture complements innovation and it measures informal drivers of an economy and the social value system within a society (Hofstede (1980)). The values and the belief system embedded in a society influence each individual’s performance. The cultural system ingrains the values and belief system of a society within an individual and thereby encourages creativity and innovation in organizations. Open culture encourages creativity, increases productivity and promotes innovation (Martins and Terblanche (2003)). Cultural dimensions mould an economy’s overall formal institutional structure as measured by economic, regulatory and political activities (Holmes et al. (2013)). Cultural dimensions such as power distance, individualism, masculinity, uncertainty avoidance, long-term orientation and indulgence measure the cultural value (Hofstede (1980)) of the individuals in an economy. Independently, these dimensions measure the behaviour of individual members in a society, whereas collectively they represent the values ingrained in a society. Hence, understanding the different dimensions of culture helps international businesses to address the individuals in a firm more efficiently and increase their performance. Therefore, an individual’s adaptability to the culture of an international organization might influence an economys ability to attract FDI. However, an economy’s cultural adaptability may interact with country governance for better understanding of global needs and attract inward FDI. Hence, we hypothesize an interaction effect between country governance and cultural factors (power distance, individualism, masculinity, uncertainty avoidance, long term orientation and indulgence) to have an effect in attracting inward FDI. 5

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Hypothesis 5. Greater cultural adaptability moderates country governance in attracting inward FDI in emerging economies.

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3. Data and Methodology

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3.1. Data Our panel data includes 22 economies that are advanced and secondary emerging economies. Based on FTSE 2015 country classification as of September 2015, the emerging economies considered are as follows: Brazil, Chile, China, China Macao SAR, China Taiwan, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, the Russian Federation, South Africa, Thailand, Turkey, and the United Arab Emirates. The sample comprises data from the World Bank and UNCTAD during the period 1996 to 2014 and those of the World economic forum during the years 2006 to 2014. We examine the effect of corporate governance and culture for the period 2006 to 2014, and we exclude the influence of culture and corporate governance on FDI for the period 1996 to 2005 due to non-availability of data. The sample size varies between 198 to 418 observations. Figure.1 provides the definition of variables and the sources of data. The dependent variable, inward FDI, comprise net sales of shares and loans, reinvested earnings in partner companies and net intra-company loans. The control variables in the study include GDP growth, inflation, and merchandise trade (indicator of trade openness). GDP growth is the annual percentage rate of the change of gross domestic product, while inflation is the annual percentage change in the consumer price index. We use log of Merchandise trade (Trade) that measures the annual rate of change in trade with respect to GDP in an economy, where trade includes both imports and exports. The explanatory variable country governance index assesses an economy based on different dimensions and we use Kaufmann et al. (2011) measure of country governance. Kaufmann et al. (2011) six dimensions of country governance include voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption for the period 1996-2014. The factors take values between -2.5 to +2.5. The first dimension, voice and accountability, measures a citizens ability to express his or her ideas and views without restrictions. It also includes their association with groups. The second dimension, political stability, measures instability, terrorism and politically-supported violence. The third dimension, government effectiveness, and the fourth dimension, regulatory quality, measure the formulation, implementation and execution of sound policies without political intervention for public sector development and private sector development, respectively. Rule of law, the fifth dimension, measures the enforcement and enactment of law and order in society. The sixth dimension of governance measures corrupt practices, the illegal use of public influence, and bribery in the society. Lower values of a dimension represent a lower quality of governance, and higher values represent better governance. We adopted the methodology of Ellis et al. (2017) to calculate the country governance index for individual emerging economies. Based on this methodology, we constructed the country governance index by measuring the mean of six variables including voice and accountability, political stability, regulatory quality, government effectiveness, rule of law and control of corruption. To validate the results, we constructed a country governance index using a single factor model with varimax rotation including six country governance variables, namely, voice and accountability, political stability, government effectiveness, regulatory quality, 6

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control of corruption and rule of law3 . We measure technology using the log of number of patents registered by residents (log PatentR), log of number of patents registered by non-residents (log Patent-NR), log of research and development (RnD), log of the number of scientific articles published in journal (Journal), high technology exports (HTX) and intellectual property rights (Property Rights). We log-transformed some of the variables to reduce skewness in the data. We obtained macroeconomic variables GDP, inflation, trade and technology vaiables log Patent-R, log Patent-NR, RnD, Journal, HTX from World Bank4 . The technology readiness index score measures the attentiveness of an economy to adapting existing technology to increase productivity. The technology absorption score measures the efficiency of a firm in an economy to adopt new technology and the capacity of innovation is measured using the innovation index score. Corporate governance and corporate ethics measure the corporate governance performance of an economy. The variables property rights, technology readiness, technology absorption, innovation, corporate governance and corporate ethics are obtained from global competitiveness index (GCI)5 developed by World Economic Forum6 . Hofstede’s cultural dimensions (Hofstede (1980)), such as power distance index (PDI), individualism versus collectivism (IDV), masculinity versus femininity (MAS), uncertainty avoidance (UAI), long term orientation versus normative short term orientation (LTO), and indulgence versus restraint (IND) account for the cultural perspective of a society. Power distance identifies the unequal distribution of power among the people in a society; societies with lower power distance handle inequality better than societies with higher power distance. The second dimension, individualism versus collectivism, measures the preference of an individual for a loosely knit or tightly knit framework in society. Masculinity and femininity, the third dimension of culture, signifies individual preferences for a competitive or consensus-oriented society. The fourth dimension, uncertainty avoidance, represents the degree of risk-taking behaviour of individuals. A high score in this represents an intolerant attitude to risk, while a low score represents relaxed behaviour of people in a society. An individuals´traditional (short term) and pragmatic approach (long term) while dealing with challenges is the fifth dimension of culture. A low score on long-term orientation versus normative short-term orientation represents individuals preferring a normative approach, whereas a high score represents individuals preferring a pragmatic approach. The sixth dimension, indulgence versus restraint, measures how a society permits or restrains gratification by means of relaxed or strict social norms, respectively. 3.2. Methodology We study the influence of technology, innovation and culture on FDI during the period 19962014 using a panel model with fixed effects. Equation (I) represents the basic model that includes 3 For robustness check we used the country governance index developed using single factor model in panel fixed effect regression and we found that our results remain robust. For the sake of brevity and clarity the robustness results are not reported here 4 The World Bank is a vital source of financial and technical assistance to developing countries around the world established in 1944 and is headquartered in Washington, D.C. 5 The Global Competitiveness Index was developed for the World Economic Forum by Xavier Sala-i-Martin and Elsa V.Artadi, in collaboration with the Global Competitiveness Network team, and was first introduced in The Global Competitiveness Report 20042005 6 The World Economic Forum, committed to improving the state of the world, is the International Organization for Public-Private Cooperation and established in 1971 as a not-for-profit foundation and is headquartered in Geneva, Switzerland.

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macroeconomic and country governance variables. Equation (II) measures the impact of technology on FDI. While equation (IIa) measures the ability to adopt technology, and equation (IIb) studies the effect of the capacity for innovation in emerging economies. Equation (IIc) and equation (IId) demonstrate the moderating effects of country governance on technology and innovation on inward FDI, respectively. We include corporate governance to find its effect on FDI using the panel model with fixed effects in equation (IIIa), and we study the moderation effect of country governance between corporate governance and inward FDI in equation (IIIb). We analyse the interaction effect of culture and country governance in equation (IV) to determine the relationship among Hofstede’s six culture variables using a panel model with fixed effects for the period 2006-2014. We control for country and year effects for all the models.

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I Base Model:

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FDIit = β0 + β1GDPit + β2 In f lationit + β3 T radeit + β4 V Ait + β5 PS it + β6GEit + β7 RQit + β8CCit + β9 RLit + αi + αt + ǫit II Impact of technology on FDI: (a) Ability to adopt technology:

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FDIit = β0 + β1GDPit + β2 In f lationit + β3 T radeit + β4 V Ait + β5 PS it + β6GEit + β7 RQit + β8CCit + β9 RLit + β1 0T echnologyit + αi + αt + ǫit

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(b) Capacity of innovation:

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FDIit = β0 + β1GDPit + β2 In f lationit + β3 T radeit + β4 V Ait + β5 PS it + β6GEit + β7 RQit + β8CCit + β9 RLit + β1 0Innovationit + αi + αt + ǫit (c) Moderation effect of technology between country governance and inward FDI: FDIit = β0 + β1GDPit + β2 In f lationit + β3 T radeit + β4CountryGovernanceit + β5 T echnologyit + β6 T echnologyit × CountryGovernanceit + αi + αt + ǫit

(d) Moderation effect of innovation between country governance and inward FDI: FDIit = β0 + β1GDPit + β2 In f lationit + β3 T radeit + β4CountryGovernanceit + β5 Innovationit + β6 Innovationit × CountryGovernanceit + αi + αt + ǫit

III Impact of corporate governance: (a) Impact of corporate governance on Inward FDI: FDIit = β0 + β1GDPit + β2 In f lationit + β3 T radeit + β4CountryGovernanceit + β5CorporateGovernanceit + αi + αt + ǫit (b) Moderation effect of corporate governance between country governance and inward FDI: FDIit = β0 + β1GDPit + β2 In f lationit + β3 T radeit + β4CountryGovernanceit + β5CorporateGovernanceit + β6CorporateGovernanceit × CountryGovernanceit + αi + αt + ǫit 8

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IV Moderation effect of culture between country governance and inward FDI:

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FDIit = β0 + β1GDPit + β2 In f lationit + β3 T radeit + β4CountryGovernanceit + β5Cultureit + β6Cultureit × CountryGovernanceit + αi + αt + ǫit

4. Empirical Results

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where FDIit is the inflow of FDI of 20 emerging economies, GDPit is the GDP growth, In f lationit represents inflation, and T radeit signifies merchandise trade. Six country governance variablesvoice and accountability, political stability, regulatory quantity, government effectiveness, rule of law and control of corruption are represented as V Ait , PS it , RQit , GEit , RLit , CCit . respectively. CountryGovernanceit represents the country governance index and T echnologyit represents the set of technology variables, Innovationit signifies an economy’s capacity to adopt and commit to technological innovation. Power distance, individualism versus collectivism, masculinity versus femininity, uncertainty avoidance, long-term orientation versus short-term normative orientation and indulgence versus restraint are the set of Cultureit variables that measure the effects of culture. CorporateGovernanceit is a set of corporate governance variables measured by the GCI index. The terms αi , αt and ǫit represents the country fixed effects, time fixed effects and error term respectively. We perform a Hausman test and the results reveal that panel fixed-effect estimators are consistent then panel random effect. Therefore, the fixed effect model is more appropriate to examine the variation across variables and to determine the effect of independent variables on inward FDI.

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4.1. Descriptive Statistics Table 1 shows the summary statistics of all the variables used in the study. The correlation matrix in Table 1 shows that the six governance variables exhibit high correlation among themselves, and hence, a country governance index is developed. In the case of culture variables, the mean score for power distance (0.7095) shows that the emerging economies we considered in the study exhibit a high degree of power distance and inequality in each society. The sample also shows a high score for uncertainty avoidance (0.6486), which shows economies preference for less risk-taking behaviour. The high score on the cultural dimension masculinity (0.5377) indicates that competition is the driving force for individuals. The low score for individualism (0.3391) shows that emerging economies are highly collectivistic, where individuals prefer to work in groups rather than individually. The intermediate score of long term orientation (0.4391) shows that emerging economies in our study exhibit both normative and pragmatic cultures. The intermediate score of indulgence (0.4189) also exhibits the simultaneously indulgent and restrained cultural nature of emerging economies. 4.2. Effect of innovation on inward FDI 4.2.1. Ability to adopt technology Table 2 presents the individual effect of technology variables such as patents, intellectual property rights, RnD, journal publications, high technology exports, technology adoption and technology readiness on FDI. The agility of the economies to adopt technology is measured by technology absorption and technology readiness indicators. The technology factors in emerging economies measured in terms of patents and intellectual property rights show a significant positive effect in attracting FDI. Economies that enhance their efficiency have higher technological 9

Regulatory Quality

Government Effectiveness

Political Stability

Voice&Accountability

Trade

Inflation

GDP

Inward FDI

Variables

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352

352

352

352

352

352

418

377

418

411

Obs

7.3994

-0.0018

-0.0532

0.3258

0.2751

-0.3398

0.0122

3.9741

8.1288

4.5462

2.9649

Mean

2.2369

1.5096

0.6627

0.6398

0.6382

0.5995

0.9496

0.6925

0.5790

12.4942

4.4279

2.3603

Std. Dev.

0.0329

-0.0361

-0.0642

0.0036

0.3000

0.3699

0.3693

0.2992

0.3079

0.2102

0.3501

-0.0906

0.0872

1

1

0.0631

-0.2774

-0.0605

-0.0321

0.0898

0.0788

0.0652

0.1403

-0.0003

-0.1835

1 1 1

0.4870

1

0.7736

0.7624

0.7970

1

-0.1100

-0.3204

0.9033

0.8678

0.8840

1

-0.1956

-0.4539

0.8681

0.8597

1

-0.1479

-0.3184

0.8727

1

-0.0569

-0.3808

1

0.6862

1

NU

0.1062

0.4400

0.8143

11

0.4358

0.5035

0.5789

-0.3161

10

-0.1018

0.4710

-0.0321

9

-0.1846

0.3305

0.5892

8

-0.2306

0.3378

-0.3168

7

13

14

-0.0939

0.1519

1 1

16

0.1652

0.0497

0.0530

15

0.0811

0.1149

-0.0524

1

12

Table 1: Descriptive Statistics and Correlation Matrix

-0.2826

-0.1418

6

-0.1861

0.4298

5

-0.2730

0.0375

-0.0185

4

0.0812

-0.1058

0.0130

-0.0261

-0.2130

-0.1050

1 0.2482

0.0130

-0.0602

1

0.0145

0.8328 0.0053

-0.2827

-0.0131

0.8960

0.5826

0.8125

-0.0999

0.6591

0.4926

0.5576

0.6092

0.4800

-0.0357

0.6211

0.5191

0.2098

0.4120

0.0134

0.1208

0.5919

0.2821

0.0871

0.6329

-0.0563

-0.0244

0.7023

0.5354

0.1280

0.5109

-0.1222

-0.1219

0.6942

0.3674

0.1893

0.1716

-0.0795

0.5001

0.1199

0.0919

0.1719

0.3143

0.0563

-0.0672

0.3679

0.3672

0.1081

0.0228 -0.1896

0.0127

0.0735

-0.3816

-0.1379

0.2305

15.7686 0.0420

-0.1130

12.9611

0.0121

0.0593

494

-0.0688

-0.0446

MA

PT

Control of Corruption

837

1.8533

1.0178

RI

Rule of Law

6.8979

-0.8691

SC

Patent NR

279

3

Patent R

528

2

RnD

0.0933

0.1164

0.2659

D

TE

0.1167

17

18

19

20

21

22

23

0.1718

0.1941

0.0450

0.1004

-0.1939

1

0.2596

-0.3246

1

-0.4539

1

26

0.0483

-0.2730

25

-0.3027

-0.0963

24

0.1058

0.0580

-0.4669

0.2224

-0.0186

0.3607

-0.5733

0.0866

0.1835

0.2233

-0.1122

0.1706

-0.0773

-0.3727

0.0808

0.0480

-0.125

-0.1446

-0.0997

-0.4102

0.1336

-0.013

-0.0487

-0.3160

-0.021

0.1609

0.6221

-0.0585

-0.124

0.2405

0.0309

-0.22

0.4037

27

1

10

5.9021

Journal High Technology Exports

0.0249

1

-0.1547

1

0.6662

0.4235

0.4726

0.4302

0.6675

0.7440

4.1774

0.1279

4.9333

0.2315

3.8097

1

198

1

198

0.8026

198

1

Property Rights

0.3363

0.6387

Technology Absorption

0.6447

Technology Readiness

0.5982

0.4831

0.3473

0.3933

0.4515

0.3533

0.6813

0.6653

0.6078

0.6603

0.5424

0.5532

0.8328

0.5299

0.7636

0.5246

0.0868

0.4079

0.1170

0.1039

-0.0382

0.0151

-0.0983

0.3116

0.0901

0.0509

0.3128

-0.1107

0.3262

-0.3545

-0.1051

-0.1444

-0.2226

-0.1030

-0.2260

-0.2450

0.2698

-0.0717

0.1964

-0.1475

0.0059

0.0179

0.0786

0.0235

0.2314

-0.0912

-0.2369

0.5366

0.5684

0.6201

0.5639

0.5915

0.4937

3.5133

0.4596

4.0284

0.6480

4.0934

0.6903

198

1

198

0.5232

198

1

Innovation

-0.1779

-0.3443

Corporate Governance

0.0850

Corporate Ethics

-0.1980

-0.0039 0.0603

-0.0501

0.1489

0.0161

0.0545

0.1022

-0.034

0.4435

-0.0256

0.2425

0.2199

-0.1605

0.1064

0.1182

-0.1256

0.0868

-0.0239

0.2951

0.3403

-0.2870

0.1232

-0.0824

-0.0116

0.0214

0.1933

0.3306

-0.0991

0.1635

0.0325

0.0523 0.4746

-0.1641

0.0715

0.0976

-0.2387

0.2817

0.5791

-0.4396

0.1478

-0.0727

-0.2261

-0.0672 0.1418

0.1089

0.2048

0.1610

-0.0351

-0.0165

0.1364

-0.1387

0.5800

0.0916

0.0123

-0.1547

-0.0196

-0.1755

-0.1242

0.2203

-0.0053

0.0872

0.4564

0.0000

0.0227

-0.0137

-0.0580

0.0475

0.1110

-0.2484

0.5585

-0.0100

-0.0786

0.0432

0.1390

0.0820

0.4947

0.1784

0.0365

-0.0004

0.1309

0.0117

0.1300

0.7095

0.2190

0.2290

0.3391

0.2069

0.4426

0.5377

0.2262

-0.2450

418

0.6486

0.3174

418

0.4391

-0.2475

418

0.4189

0.1532

Power Distance

418

0.1672

Individualism

418

0.1955

Masculinity

399

0.1871

Uncertainity Avoidance

0.0230

Long Tern Orientation

21. Corporate Ethics 22. Power Distance 23. Individualism 24. Masculinity 25. Uncertainty Avoidance 26. Long Tern Orientation 27. Indulgence

1. Inward FDI 2. GDP 3. Inflation 4. Trade 5. Voice&Accountability 6. Political Stability 7. Government Effectiveness 8. Regulatory Quality 9. Control of Corruption 10. Rule of law 11. Patent NR 12. Patent R 13. RnD 14. Journal 15. High Technology Exports 16. Property Rights 17. Technology Absorption 18. Technology Readiness 19. Innovation 20. Corporate Governance

-0.0731

Indulgence

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11

Yes No 316 1.73 0.46

Yes Yes 316 3.00 0.55

Yes No 297 6.17 0.62

(-2.76) Yes Yes 297 4.61 0.68

(-1.78)

-4.0174*

0.6231*** (5.27)

0.6439*** (5.35)

-6.0858***

-1.6010* (-1.92)

1.0749* (1.77)

-2.4234*** (-2.87)

-0.0714 (-0.10)

1.2067** (2.12)

-0.3174 (-0.42)

0.1112 (0.15)

-0.5427 (-0.70)

Yes No 291 3.34 0.58

(-0.97)

-2.1620

0.1521 (0.68)

-1.7085* (-1.73)

Yes Yes 291 3.03 0.63

(-0.14)

-0.3747

0.2711 (1.04)

-1.3267 (-1.34)

1.3320* (1.87)

-0.7668 (-1.03)

-0.3881 (-0.47)

0.6454* (1.77)

-0.3532 (-0.59)

0.6155 (1.04)

-0.0168 (-1.33)

Model 3 0.0271 (0.77)

2.0383*** (3.15)

-0.8027 (-1.03)

-0.8265 (-0.99)

0.8531** (2.34)

-0.7021 (-1.24)

1.2759** (2.45)

-0.0087 (-0.75)

0.0425 (1.52)

Yes No 220 2.76 0.57

(1.08)

3.0065

-0.1400 (-0.28)

Yes Yes 220 2.79 0.64

(1.77)

5.0205*

-0.0044 (-0.01)

-2.0221* (-1.90)

1.4035 (1.58)

-1.5297 (-1.48)

0.2967 (0.27)

0.3344 (0.67)

-0.2076 (-0.29)

-0.3703 (-0.58)

-0.0156 (-0.76)

Model 4 0.0146 (0.36)

-3.1555*** (-2.91)

1.4594* (1.84)

-1.4060 (-1.39)

0.1029 (0.09)

0.7377 (1.51)

-0.8766 (-1.24)

0.2310 (0.37)

-0.0190 (-1.19)

0.0378 (1.13) -0.0124 (-0.96)

Model 5 0.0486 (1.09)

Yes No 222 2.65 0.45

(-0.90)

-2.8596

0.3017 (0.71)

-0.7955 (-0.71)

2.7706*** (3.28)

-0.4960 (-0.60)

-0.9119 (-0.98)

0.6262 (1.42)

-1.1392 (-1.46)

1.0881 (1.46)

Yes Yes 222 2.94 0.54

(0.10)

0.4686

0.1232 (0.21)

-0.4578 (-0.41)

2.3692*** (2.69)

-0.7141 (-0.91)

-0.3621 (-0.40)

0.2799 (0.63)

-0.5171 (-0.65)

0.4822 (0.58)

Yes No 281 1.76 0.43

(1.25)

3.0507

-0.0117 (-0.36)

-1.9393** (-1.99)

0.2579 (0.37)

0.4959 (0.56)

0.8301 (0.94)

0.5448 (1.34)

0.0772 (0.10)

-0.1245 (-0.20)

-0.0133 (-1.02)

Yes Yes 281 2.77 0.53

(2.23)

5.7719**

0.0101 (0.28)

Yes No 187 5.78 0.70

16.4856*** (-3.97)

1.8192*** (4.37)

-1.1669 (-0.76)

0.5190 (0.54)

Yes Yes 187 3.83 0.72

(-2.00)

-10.7320**

1.1333** (2.27)

0.5238 (0.34)

1.1388 (1.18)

0.0898 (0.06)

-3.8158*** (-3.00)

0.5184 (0.81)

-2.0939** (-2.44)

Yes No 187 5.16 0.69

17.3352*** (-3.82)

2.0870*** (3.74)

Yes Yes 187 4.42 0.73

(-2.60)

-12.6255**

2.0237*** (3.56)

Yes No 187 4.40 0.68

(-0.42)

-1.7062

Yes Yes 187 3.46 0.71

(-0.44)

-1.9553

-0.4880 (-0.68)

1.6824 (0.97)

-0.5545 (-0.54)

-0.0152 (-0.01)

-2.4607* (-1.80)

0.8307 (1.23)

-1.4032 (-1.44)

2.8381*** (3.33)

-0.0326 (-0.02)

0.6608 (0.68)

-0.8332 (-0.55)

-3.2712** (-2.58)

0.5466 (0.85)

-1.5208* (-1.80)

2.1060** (2.39)

1.3611 (0.84)

-0.4731 (-0.47)

-0.4278 (-0.29)

-3.0533** (-2.41)

0.8584 (1.30)

-1.5264 (-1.60)

1.9742** (2.02)

0.0818 (1.25)

Model 10 0.0462 (1.09)

2.4935*** (2.86)

0.1251** (2.26)

0.0528* (1.67)

Yes No 187 4.80 0.68

16.2542*** (-3.55)

Yes Yes 187 3.88 0.72

(-2.07)

-11.0443**

PT

RI -1.3679*** (-2.80)

0.9889 (0.61)

0.2394 (0.24)

-0.3738 (-0.25)

-2.0248 (-1.53)

0.6838 (1.05)

-1.6559* (-1.93)

1.9554* (1.90)

0.0636 (0.96)

Model 9 0.0515 (1.20)

2.6062*** (2.96)

0.0790 (1.41)

0.0431 (1.32)

SC

1.4953 (0.94)

-0.1233 (-0.12)

0.2050 (0.14)

-3.6041*** (-2.87)

0.5243 (0.81)

-1.5753* (-1.69)

1.7461* (1.83)

0.0633 (0.99)

Model 8 0.0547 (1.33)

2.7088*** (3.13)

0.0857 (1.57)

0.0698** (2.25)

NU

0.1924 (0.11)

-0.2157 (-0.21)

0.1812 (0.12)

-3.5047*** (-2.68)

-3.9356*** (-3.14) -0.0151 (-0.01)

1.0840 (1.61)

-1.6307* (-1.70)

-1.8924** (-2.27) 1.1269* (1.75)

2.5786** (2.48)

0.0494 (0.75)

Model 7 0.0583 (1.38)

3.2711*** (3.77)

0.0507 (0.93)

0.0636** (2.08)

MA

-0.9298 (-0.98)

0.6217 (0.82)

-0.1582 (-0.19)

0.6926 (0.80)

0.3776 (0.93)

0.3270 (0.46)

-1.0199 (-1.44)

-0.0052 (-0.37)

Model 6 0.0890*** 0.0679* (2.62) (1.65)

D

TE

-0.0075 (-0.61)

0.0554 (1.55)

Table 2: Impact of Country Governance, Technology and Innovation on Inward FDI

Note: Values are coefficients and robust t-statistics are reported in the parentheses. P-values as of *p < 0.10, **p < 0.05, ***p < 0.01.

Country Effect Year Effect No. of Obs. F-Stat R-Squared

Constant

Innovation

Technology Readiness

Technology Absorption

Property Rights

High Technology Exports

Journal

RnD

Patent-R

Patent-NR

(2.46)

-0.5973 (-0.69)

-1.5657* (-1.76)

Rule of Law

(1.39)

0.5737 (0.85)

0.4322 (0.69)

Control of Corruption

4.8681**

0.0096 (0.01)

0.5557 (0.70)

Requlatory Quality

2.7799

0.2396 (0.31)

Government Effectiveness 0.2205 (0.28)

0.5897* (1.77)

0.8261** (2.44)

0.4524 (1.22)

0.5948 (1.58)

Political Stability

-0.0154 (-0.03)

Voice and Accountability -0.3791 (-0.65)

-0.2487 (-0.48)

1.2189*** (2.75)

-0.6973 (-1.44)

-0.0382 (-0.08)

Trade -0.4243 (-0.83)

-0.0296** (-2.44) 0.7608 (1.60)

-0.0259** (-2.36)

-0.0061 (-0.45)

-0.0127 (-1.02)

Inflation

Model 2 0.0009 (0.03)

0.0133 (0.53)

Model 1 0.0714*** 0.0483 (2.67) (1.51)

GDP

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SC

RI

PT

readiness to attract more FDI. The most important factors in terms of technology adoption are the number of patents, followed by technology absorption, intellectual property rights and technology readiness to attract FDI. The technology variables patent, intellectual property rights and technology absorption are positive and statistically significant at the 1% level. A higher number of patents (NR) and better intellectual property rights signal a better capacity to innovate and attract FDI. Thus, emerging economies can attract more FDI by increasing their ability to adopt the newest and latest technology. Upgrading the level of technology helps emerging economies to strengthen their competency and will lead them to attract more investment. The higher the control of corruption, the more efficient the government and the higher the flow of FDI to emerging economies. The coefficients for the country governance factors rule of law, government effectiveness, and voice and accountability are negative, signifying a poor quality of the formulation and implementation of rules, poor policies and freedom of expression in emerging economies that hinder the inward flow of FDI.

D

MA

4.2.2. Capacity of innovation In Table 2, model 10 presents the effect of innovation on inward FDI in emerging economies. The coefficient of innovation is positive, and it is statistically significant at the 1% level. When emerging economies innovation increases, it means the capacity to absorb and implement new technology increases. This will cause an increase in the capability of technological innovation and consequently increase inward FDI.

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TE

4.2.3. Moderation effect of technology with country governance and FDI Table 3 presents the moderation effect of technology and country governance on inward FDI. The country governance index adopted from the Elis method is used in Table 3. The coefficient of the interaction variable of patents and the country governance index is positive, and it is statistically significant at the 5% level. Model 1 shows that an economy with better policy formulation, implementation and control has the power to attract FDI. Emerging markets with better country governance are less preferred for inward FDI. However, the positive influence of the interaction between patents and the country governance index shows that when the number of patents (NR) is higher, better country governance (0.5263) positively moderates the impact of patent (0.9045) and makes the economy more attractive for inward FDI. In model 7, the technology variable intellectual property rights is positive and statistically significant, while the interaction with the country governance index shows a negative effect. The results show that the lower the level of country governance (-2.2149), the lower the impact of the interaction term with intellectual property rights (-1.644) on inward FDI. The results signal that greater country governance moderates the effect of intellectual property rights and makes it less attractive, whereas economies with higher intellectual property rights and lower country governance are more preferred for inward FDI. The lower the level of governance, the higher the ability to adopt new technology to attract in FDI in emerging economies. 4.2.4. Moderation effect of innovation with country governance and FDI Although there is a high level of technology adoption and innovation capacity, country governance may hinder inward FDI. Hence, it is important to examine how country governance moderates the effect of technology absorption and innovation in attracting FDI. In Table 3, model 10 presents the effect of innovation and country governance on inward FDI. The coefficient of innovation is positive and statistically significant at the 1% level, while the coefficient of the interaction between innovation and the country governance index is negative, and it is statistically 12

Property Rights

High Technology Exports

Journal

RnD

Patent-R

13 Yes Yes 316 3.75 0.55

(2.69)

(1.75)

Yes No 316 2.50 0.45

4.7820***

3.1691*

Yes No 297 7.92 0.60

(-3.11)

-6.6918***

Yes Yes 297 5.39 0.67

(-1.67)

-3.5769*

Yes No 291 2.40 0.55

(-0.92)

-2.0856

0.1177 (0.41)

-0.0645 (-0.31)

Yes Yes 291 3.15 0.62

(-0.42)

-1.0618

0.1208 (0.44)

0.2065 (0.85)

-0.9191 (-0.52)

0.7752 (1.42)

Note: Values are coefficients and robust t-statistics are reported in the parentheses. P-values as of *p < 0.10, **p < 0.05, ***p < 0.01.

Country Effect Year Effect No. of Obs. F-Stat R-Squared

Constant

Country Governance # Innovation

Country Governance # Technology Readiness

Country Governance # Technology Absorption

Country Governance # Property Rights

Country Governance # HTX

Country Governance # Journal

Country Governance # RnD

Country Governance # Patent R

Country Governance # Patent-NR

Innovation

Technology Readiness

Technology Absorption

0.5263** (2.21)

0.3782** (2.24)

0.5479*** (3.27)

0.3044 (1.37)

-0.7575 (-0.42)

-3.6161** (-2.03)

-2.3998 (-1.39)

0.8251 (1.14)

0.2117 (0.28)

Country Governance

Patent-NR

1.3521*** (2.68)

1.0177** (2.23)

1.4433*** (3.20)

-0.6887 (-1.56)

-0.1385 (-0.31)

Trade

-0.0274** (-2.34)

Model 3 0.0274 (0.84)

Inflation

-0.0171 (-1.53)

0.0401 (1.46)

-0.0278** (-2.40)

-0.0250** (-2.38)

-0.0106 (-0.88)

-0.0132 (-1.14)

Yes No 220 1.77 0.53

(0.79)

2.1129

-0.1268 (-0.21)

0.0084 (0.02)

Yes Yes 220 3.01 0.63

(1.90)

5.1297*

-0.6969 (-1.17)

0.2865 (0.53)

-2.8297** (-2.27)

-0.3390 (-0.54)

-0.0357** (-2.01)

Model 4 0.0121 (0.27)

-2.9154** (-2.23)

0.2843 (0.45)

-0.0265* (-1.69)

0.0492 (1.36)

Yes No 222 2.89 0.42

(0.11)

0.3335

-0.8357* (-1.78)

-0.3725 (-0.94)

Yes Yes 222 3.22 0.52

(0.18)

0.8111

-0.6356 (-1.39)

-0.0533 (-0.10)

4.5577 (1.41)

0.6673 (0.89) 0.3010 (0.28)

-0.1047 (-0.17)

-0.0149 (-1.24)

Yes No 281 1.99 0.42

(1.34)

3.1742

-0.0045 (-0.13)

-0.0131 (-0.41)

Yes Yes 281 3.24 0.52

(2.31)

5.5754**

-0.0118 (-0.36)

Yes No 187 8.84 0.69

11.4357*** (-2.80)

-2.2822*** (-3.68)

1.2821*** (3.25)

7.2346** (2.32)

Yes Yes 187 5.35 0.72

(-0.54)

-2.5943

-2.2149*** (-3.66)

Yes No 187 5.49 0.66

14.9033*** (-3.43)

0.6075 (0.64)

1.5639*** (2.78)

-5.2157 (-1.08)

Yes Yes 187 4.83 0.71

(-2.17)

-9.7820**

0.4832 (0.51)

-2.0425

-0.4394 (-0.65)

Yes No 187 5.97 0.66

(-0.54)

-0.5599 (-0.85)

0.3808 (0.13)

Yes Yes 187 3.93 0.70

(-0.15)

-0.6089

-0.4039 (-0.61)

Yes No 187 6.77 0.67

( -3.52 )

-15.97947

-2.4218** (-2.07)

2.8373*** (3.35)

5.5116 (1.23)

2.1767** (2.57)

Yes Yes 187 4.51 0.71

(-1.59 )

-8.1773

-1.9446* (-1.70)

1.9125** (2.20)

4.6900 (1.07)

1.2660 (1.39)

0.0995 (1.57)

Model 10 0.0114 (0.31) 0.1327** (2.49)

0.0415 (1.40)

PT

RI

-1.4369*** (-3.17)

0.9147 (0.30)

1.5240 (1.58)

0.0841 (1.31)

Model 9 0.0072 (0.19)

2.5533*** (3.01)

0.0831 (1.52)

0.0146 (0.46)

SC

1.8601*** (3.19)

-4.8370 (-0.99)

1.0006 (1.11)

0.0910 (1.46)

Model 8 0.0083 (0.23)

2.3731*** (2.78)

0.1102** (2.04)

0.0434 (1.44)

NU

0.5709 (1.31)

7.9611** (2.53)

0.9865 (1.04)

0.0868 (1.41)

Model 7 0.0244 (0.69)

2.2537*** (2.63)

0.0937* (1.77)

0.0514* (1.81)

MA

0.0081 (0.23)

0.9495 (0.91)

-0.9384 (-1.41)

-0.0120 (-0.95)

Model 6 0.0889*** 0.0679* (2.65) (1.65)

D

TE

5.8650* (1.80)

1.3484* (1.92)

-0.0306*** (-2.61)

Model 5 0.0508 (1.15)

-0.0255** (-2.18)

0.0609* (1.70)

Table 3: Moderation effect of Technology, Innovation and Country Governance on Inward FDI 0.0197 (0.79)

Model 1 0.0697*** 0.0478 (2.66) (1.53)

GDP

Model 2 0.0155 (0.53)

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PT

significant at the 5% level. We find strong evidence that the lower the level of country governance (-1.9446) in emerging economy, the lower the effect of innovation (-0.03) on inward FDI. Consequently, with higher the country governance, the better the ability of innovation to attract FDI.

TE

D

MA

NU

SC

4.3. Impact of corporate governance In Table 4, model 2 presents the effect of corporate governance on inward FDI. In this model, the effect of trade is positive and statistically significant, While, country governance is negative and statistically significant at the 10% level. The effect of corporate governance is positive and significant at the 10% level. Economies with stronger corporate governance structures have the ability to increase performance, which therefore leads to better protection of investors and shareholders. Emerging economies with a higher level of protection will attract significantly more foreign investment. In Table 4, model 3 presents the moderation effect of country governance and corporate governance on inward FDI. The interaction term is negative and statistically significant at the 1% level. The moderating effect is negative, which suggests that the lower the country governance level (-1.8104) in emerging economies, the lower the effect of corporate governance (-1.1594) on inward FDI. The results signify that emerging economies having higher corporate governance standards may increase their attractiveness for FDI with better country governance. When the firm performance increases with better corporate governance principles and policies, the advantage of investing in such an economy subsequently increases profits. Therefore, emerging economies need to focus on country governance to utilize the benefits of good corporate governance standards to encourage FDI.

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4.4. Moderating effect of culture with country governance and FDI The effect of culture is measured in terms of power distance, masculinity, individualism, uncertainty avoidance, long term orientation and indulgence. Table 5 present the effects of the interaction between culture and country governance on inward FDI. The interaction between the culture variables power distance and indulgence with country governance are positive and statistically significant at the 10% and the 5% level, respectively, while individualism has a negative impact and is statistically significant at the 5% level. The results signify that the higher the power distance, the greater the effect of country governance on the inward flow of FDI. Emerging economies exhibit a high power distance where individuals are adapted to work in centralized environments, depend on their immediate supervisor for direction, and expect control and communication from top authorities. High power distance cultures encourage the individual and motivate them to work hard, and thereby influence their attitudes towards work. Therefore, emerging economies with a high power distance perform significantly better in an environment of good country governance. Societies with an indulgent or restrained attitude towards leisure have a positive influence on inward FDI. Model 3 shows the negative effect of the interaction term between individualism and corporate governance on inward FDI. The sample mean 0.3391 shows that emerging economies in our sample are collectivistic societies, where trust and loyalty are important factors in the society, and individuals belong to integrated groups that protect everyone in the group. The negative effect signifies that the less collectivistic a culture is, the lower the influence of country governance on inward FDI. The individuals show loyalty and build long term relationships with organizations; therefore, more trustworthy economies tend to receive more FDI. 14

-0.6887 (-1.56)

-0.1385 (-0.31) 0.2117 (0.28)

Inflation

Trade

Country Governance (Elis Method)

15 Yes No 316 2.50 0.45

Constant

Country Effect Year Effect No. of Obs. F-Stat R-Squared Yes Yes 316 3.75 0.55

4.7820*** (2.69) Yes No 187 6.75 0.66

Yes Yes 187 4.47 0.70

-7.9302 (-1.50)

1.1594* (1.74)

1.9093*** (2.88)

-16.9486*** (-3.59)

-2.5431* (-1.69)

1.6886* (1.79)

2.9640*** (3.42) -3.4181** (-2.39)

0.0712 (1.11)

0.0148 (0.40)

Model 2

0.0830 (1.51)

0.0436 (1.46)

TE

Yes No 187 8.13 0.68

-12.3230** (-2.60)

-3.2962*** (-3.54)

1.4993** (2.31)

11.2708** (2.58)

Yes Yes 187 5.37 0.72

-3.8818 (-0.75)

-3.2093*** (-3.55)

0.8171 (1.26)

-15.4830*** (-3.77)

1.5726*** (3.37)

-3.1400** (-2.28)

2.8906*** (3.40)

Yes No 187 7.46 0.66

0.0862 (1.35)

0.0126 (0.34)

Model 4

Yes Yes 187 4.23 0.69

-4.9063 (-0.88)

0.4863 (0.82)

-1.9392 (-1.31)

1.5576 (1.57)

Yes No 187 7.00 0.67

-13.2797*** (-3.15)

-1.3966** (-2.00)

1.3808*** (2.92)

2.6304 (0.82)

2.5765*** (3.01)

0.0951* (1.79)

0.0453 (1.54)

Yes Yes 187 4.23 0.70

-3.1323 (-0.56)

-1.2576* (-1.83)

0.3327 (0.56)

3.2251 (1.02)

1.3058 (1.31)

0.0872 (1.37)

0.0186 (0.50)

Model 5

Yes No 187 6.57 0.69

-13.8229*** (-2.88)

0.5269 (0.54)

-3.6255*** (-2.74)

1.0080* (1.81)

0.7208 (0.92)

10.4405** (2.38)

2.4697*** (2.89)

0.0961* (1.81)

0.0485* (1.69)

Yes Yes 187 4.77 0.73

-2.4488 (-0.43)

1.0033 (1.05)

-4.2542*** (-3.25)

-0.3902 (-0.56)

1.0709 (1.36)

12.1848*** (2.84)

0.9593 (0.99)

0.0992 (1.58)

0.0249 (0.69)

Model 6

PT

RI

SC

NU

MA

0.0938* (1.75)

0.0410 (1.39)

D

11.6122*** (2.74)

1.1306 (1.22)

0.0977 (1.57)

0.0959* (1.80) 2.3415*** (2.74)

0.0250 (0.70)

0.0519* (1.80)

Model 3

Table 4: Moderation effect of Corporate Governance and Country Governance on FDI

Note: Values are coefficients and robust t-statistics are reported in the parentheses. P-values as of *p < 0.10, **p < 0.05, ***p < 0.01.

3.1691* (1.75)

Country Governance # Corporate Ethics

Country Governance # Corporate Governance

Corporate Ethics

Corporate Governance

-0.0106 (-0.88)

-0.0132 (-1.14)

0.8251 (1.14)

0.0478 (1.53)

0.0697*** (2.66)

GDP

Model 1

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Table 5: Moderation effect of culture with country governance on FDI

PT -0.0113 (-0.94)

0.0428 (1.38)

-0.0132 (-1.13)

0.0699*** (2.65)

-0.0101 (-0.83)

0.0487 (1.55)

-0.0152 (-1.30)

0.0591** (2.15)

3.4700* (1.70)

-0.6158 (-1.39)

-0.0139 (-1.13)

0.0354 (1.09)

-0.4096 (-0.21)

-0.1224 (-0.27)

-0.0129 (-1.11)

0.0677** (2.52)

0.7825 (0.41)

-0.6874 (-1.55)

-0.0106 (-0.87)

0.0477 (1.50)

-3.2785** (-2.09)

-0.3209 (-0.70)

-0.0093 (-0.78)

0.0831*** (3.08)

-2.5293 (-1.63)

-0.7866* (-1.75)

-0.0058 (-0.45)

RI -0.0135 (-1.18)

0.0681*** (2.61)

2.7443 (1.31)

-0.0747 (-0.17)

5.1354*** (2.81)

8.9085** (2.46)

D

3.9439** (2.12)

9.5180** (2.55)

Yes No 300 3.58 0.55

TE

NU

SC

0.0474 (1.52)

1.9349 (0.66)

-0.6943 (-1.57)

4.7764*** (2.66)

Yes Yes 300 3.38 0.46

MA

-0.0114 (-0.94)

0.4247 (0.14)

-0.1389 (-0.31)

3.0782* (1.68)

Yes No 316 3.55 0.55

0.0698** (2.12)

0.0715*** (2.73)

-0.7383* (-1.69)

Model 7

-0.0137 (-1.19)

3.6472*** (2.60)

Model 6

0.0478 (1.53)

-0.1629 (-0.36)

Model 5

-0.0106 (-0.88)

2.6391* (1.80)

Model 4

0.0697*** (2.66)

-0.7706* (-1.75)

Model 3

-0.0132 (-1.14) -0.1804 (-0.40)

Model 2

GDP

-0.6887 (-1.56)

Model 1

Inflation -0.1385 (-0.31)

10.9476* (1.89)

-6.7532* (-1.66)

Trade

7.9275 (1.31)

4.5432** (2.55)

Yes Yes 316 2.02 0.45

-2.0685 (-0.39)

2.8813 (1.58)

Yes No 316 3.67 0.55

-0.3978 (-0.07)

4.8359*** (2.71)

Yes Yes 316 2.34 0.46

-9.4371** (-2.35)

3.1803* (1.75)

Yes Yes 316 3.56 0.55

-8.1911* (-1.93)

5.5752*** (3.10)

Yes No 316 2.00 0.45

0.0972 (0.02)

3.7514** (2.05)

Yes Yes 316 3.89 0.56

1.4284 (0.35)

5.3133*** (2.96)

Yes No 316 2.76 0.46

-4.5703 (-1.39)

Yes Yes 316 3.77 0.56

-4.4060 (-1.30)

-5.3117 (-1.24)

Yes No 316 2.35 0.46

3.5035* (1.92)

0.8251 (1.14)

4.7820*** (2.69)

0.2117 (0.28)

Country Governance (Elis Method) Country Governance # Power Distance Country Governance # Individualism Country Governance # Masculinity Country Governance # Uncertainity Avoidance Country Governance # Long Term Orientation

3.1691* (1.75) Yes Yes 316 3.75 0.55

16

Country Governance # Indulgence Constant Yes No 316 2.50 0.45

Note: Values are coefficients and robust t-statistics are reported in the parentheses. P-values as of *p < 0.10, **p < 0.05, ***p < 0.01.

Country Effect Year Effect No. of Obs. F-Stat R-Squared

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5. Conclusion

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This paper addresses the magnitude and direction of the determinants of inward FDI in emerging economies by exploring a panel data from 22 emerging economies. The results provide new insights on the distinctive features of emerging economies that attract FDI. Macroeconomic factors are the primary drivers of inward FDI, however this study identifies that the significance of these determinants lessen and provide enough evidence for exploring other drivers exclusively for emerging economies. The empirical analysis shows that in emerging economies, growth of technology and innovation play an important role in captivating FDI. The results show the strengthening effect of technology, innovation and firm governance, the weakening effect of country governance, and the interaction effect of country governance with culture, innovation and corporate governance. Greater number of patents registered by nonresidents, innovation and high firm-level corporate governance leads to greater FDI. Country governance positively interacts with the cultural dimensions such as power distance and indulgence and interacts negatively with individualistic culture. Cultural dimensions seem to behave differently in attracting FDI even in the presence of good country governance. Country governance interacts negatively with intellectual property rights, innovation and corporate governance signalling that the prevalence of good country governance in emerging economies is important to effectively utilize their technology, capacity for innovation and corporate governance. Overall, this paper highlights that technology transition is the genesis for the evolution of international investment in emerging economies. The technological transformation supported by ownership-specific advantages, such as patents registered by non-residents, has been successful in changing country and corporate governance structures in emerging economies. A unique effort in this study is the investigation of the extent to which country governance interacts with technology, innovation, corporate governance and culture in increasing the attractiveness of an emerging economy. Rapidly growing economies with high power distance and a culture of indulgence have been the investor’s natural choice for investment because of rapid execution of business policy and higher productivity in international business environments. Thus, emerging economies expanding steadily in the world economy successfully use the relationship between technology, corporate governance and culture. The empirical evidence suggests that emerging economies dominate the international business environment by their technical, operational and social efficiency. Technology, corporate governance and culture play an important role in increasing the efficiency of emerging economy. Although not all emerging economies are identical in nature, they exhibit similarity in regulating technology and corporate governance structure to draw the attention of foreign investors. The moderating influence of corporate governance and culture support the fact that emerging economies having a collectivistic approach are uncertain about foreign investment decisions. Lower creativity reduces the commitment to technological innovation, and therefore, increasing the accountability of individuals improves creativity and enhances the attractiveness of foreign direct investment in emerging economies. Emerging economies have to focus on how to use technology, innovation, corporate governance and culture as tools to expand their capacity for governance and increase their attractiveness to foreign investment for long-term sustainable growth. While prior research shows the impact of country governance in attracting FDI, we find that with respect to emerging economies, the significance of country governance factors declines when including technology, innovation, corporate governance and culture. We differ from prior studies by proving that technology and innovation are the crucial factors that attract FDI in emerging economies. More than the effect of country governance factors, the interaction between 17

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corporate governance and culture of the economy ensures a greater flow of FDI to emerging economies. Our study has a number of policy implications. Economies seeking inward FDI should be aware of the changing dynamics of foreign investment and those factors that attract FDI. A number of traditional determinants that have been motivating factors earlier are now the essential measures. At present, distinct features of the investing economies have the most important role to play. This is especially important for emerging economies that strive to increase technical, operational and social efficiency. Understanding the complexity in attaining overall efficiency could help emerging economies to develop their technological adoptability, innovative capacity, corporate governance standards and cultural adaptability. Policymakers can develop a proactive strategy that consists of all the significant micro and macro factors identified in this study to increase the attractiveness of an economy. While we concentrate on the overall corporate governance index of an economy, future research could explore the relationship between other corporate governance factors, such as accounting and reporting standards, investor protection, and the role of minority shareholders to identify the specific factors that need to be addressed. In addition, future research could examine how the influence of technology, innovation and culture would vary for transitional and developed economies.

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Acknowledgements

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We gratefully acknowledge the anonymous reviewers and participants of the Journal of International Financial Markets, Institutions and Money (JIFMIM) Special Issue Symposium held in Shanxi, China and the JIFMIM Special Issue Conference held in Puer, China for their valuable feedback to improve and refine this paper. We also thank the participants of the 11th Annual Conference of Knowledge Forum, whose comments and reviews substantially improved the paper. References

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Figure .1: Variable, Definition, Source

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Highlights

• Higher country governance higher the ability of technology and innovation on FDI.

RI

• Lower country governance lowers the effect of corporate governance to attract FDI. • Higher the power distance, the greater the effect of country governance on FDI.

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• In less collectivistic culture the influence of country governance on FDI is low.

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