Planting the Flag: Why Institutional Void Entrepreneurship Can Foster Foreign Direct Investments Inflows

Abstract

The main assumption of the New Institutional Economics (NIE) is that the better a country establishes its institutional environment, guaranteeing safeguards for investments, the more investments will occur in this state. Foreign Direct Investment (FDI) inflow, for instance, depends not only on the institutional strength of the host country, but also on the entrepreneurial decision of the investor; FDI trends are derived from an entrepreneurial evaluation of institutional conditions and the possible gains and risks of performing the investment. It is therefore possible to consider “institutional void entrepreneurship,” entrepreneurs who tend to invest in states with institutional voids in order to gain extra rents by exploiting this institutional gap. Keeping this objective in mind, the present research intends to evaluate which institutional domains (legal, economic and politic) are more significant for FDI attraction. To this end, we analyse two regions, Latin America and Sub-Saharan Africa, collecting data on international organizations and executing ten econometric models, based both on ordinary last squares regressions (OLS) and fixed- and random-effect panel data. The results demonstrate that despite the importance of the institutional environment, the property rights score (legal domain) is more important than other domains. Moreover, in contrasting the two distinct environments we found that the importance of property rights can be conflicting, reinforcing the argument that institutional void entrepreneurship can flourish in regions with poorer institutional safeguards.