FDI Escapism: the effect of home country risks on outbound investment in the global economy

Abstract

Over the past few decades, large numbers of literatures in behavior finance have examined firm's internationalization motives, with focused on how host country's risk components affect investment inflow. But the effects of home country risk on investment outflow remain unexamined. Therefore, based on the conceptualization of FDI escapism and the combine frameworks of Dunning's eclectic paradigm and internationalization theory, the objectives of this study are twofold: First, to examine and explain the effects of home country composite risks (which encompasses economic risks, financial risks, political risk) on firms' internationalization motive through outward FDI. Second, to determine which components of home country risk "pushes" firms to initiate the FDI escapism phenomenon in global market. Findings reveal that home country composite risk has moderate adverse effect on investment flow abroad, contributed by both the political and financial risk components, which may give rise to escaping FDI. These findings suggest that firm may initiate outward FDI as a partial escape strategy to address the political and financial challenges in their home country. These results are robust to endogeneity issue and have several substantial implications for policy design to reduce country risks in order to achieve firm's specific objective and government policy goals.