Marina Di Giacomo (Università di Torino)

“Bilateral Trust and the Ownership Structure of Foreign Direct Investments: Evidence from European Firm Level Data”

abstract

It is often argued that the foreign direct investments (FDIs) have positive effects on host countries. In particular, multinationals tend to have some competitive advantage based on superior technology or other firm-specic knowledge and, therefore, inward FDIs are believed to generate knowledge spillovers and productivity improvements which benet the domestic economy. FDIs are however heterogenous and the extent of spillovers, and therefore their effect on productivity growth, is likely to depend not only on the number (or intensity) of foreign subsidiaries located in a given country but also on their characteristics, such as the ownership structure (the type of controlling shareholder, andthe presence of other co-investors), and the distribution of investments across industries.

A recent strand of empirical literature (Guiso et al, 2009) has pointed out that bilateral trust is likely to be an important determinant of bilateral economic exchanges including FDIs. By using a brand new firm-level dataset assembled from Amadeus we test whether indeed bilateral trust has an effect on the intensity of FDIs. We improve on existing literature by also looking at a number of other characteristics of the FDIs, that may be affected by bilateral trust. We expect trust to have a role on the ow of FDIs across European countries, aswell as on the choice of the industry where to invest and the ownership structure of the investment. From a methodological point of view, we treat our trust measures as endogenous and at the same time we also exploit the discrete nature of our main FDI variable.

Overall, our empirical findings suggest that trust matters when looking atthe intensity of bilateral initiatives, especially when the foreign controlling shareholder is a corporate investor as opposed to an individual (or family) investor. Also, trust increases the probability of co-investing with a partner from the country of destination of the investment for corporate investors. Our evidence that trust positively affects foreign investments by corporate investors in larger companies, in high-tech industries, and with “local” co-investors supports the idea that trust may be an important channel of spillovers transfer.