Good Governance in Developing and Emerging Host Countries and Reinvestment of Retained Earnings by United States Multinationals: A Pooled Cross-Sectional Time-Series Analysis

Article excerpt


The last few decades witnessed a momentous increase in global foreign direct investment (FDI) inflows. A critical examination of global FDI inflows data published by UNCTAD (2008) reveals that FDI inflows increased steadily over the years. For example FDI inflows increased by more than 30% between 2005 and 2007. The increase notwithstanding, developing countries' share of FDI inflows declined from 33% in 2006 to 27.3% in 2007. Moreover, while the share global FDI inflows of some developing countries increased (e.g. Brazil, India and Malaysia) in recent past, the share of many others (e.g. Argentina, Venezuela, South Korea, South Africa, and so on) declined significantly. Seemingly, there is concordance in both theoretical and empirical international business (IB) literature suggesting that the uneven spatial distribution of FDI is attributable to differences in characteristics of potential host countries (Root and Ahmed, 1978; Nigh, 1985; Fatehi-Sedeh and Safizadeh, 1988; Wheeler and Mody, 1992; Wei, 2000; Stein and Daude, 2002; Globerman and Shapiro, 2003; Benassy-Quere, et al., 2007; Daude and Stein, 2007). The central tenet of the literature is that economic characteristics of a host country coupled with the quality of its government regulations determine its relative attractiveness to foreign investors. .

The apparent concordance in the extant literature notwithstanding, it is important to note that researchers have in the past focused their attention, primarily, on questions about the explanatory power of an array of independent variables rather than on questions about the nature of FDI (Quijano, 1990; OECD, 1999; Desai et al., 2005). It is therefore not surprising that FDI has been operationalized in prior literature as a monolithic variable rather than a multidimensional one. To make meaningful contributions to the development of a comprehensive theory in this area of research, it is crucial that the researchers are cognizant of the multidimensionality of FDI.

Brewer (1993) asserts that disaggregation of FDI is vitally important since each component (new equity, reinvested earnings1 and inter-company debt flows) may respond differently to the same set of predictor variables. Likewise, Auerbach and Hassert (1993), postulate that FDI comprises a number of dissimilar components that can respond differently to a given explanatory variable. Hence, the sensitivity of FDI to a given set of stimuli is apt to be greatly influenced by the component which accounts for the largest proportion of total FDI.

Although the proportion of reinvested earnings (reinvestment) to total United States FDI outflow has increased steadily over the years, it has largely been neglected in IB literature. This prompted Lundan (2006), to posit that "to date nothing has been written regarding the empirical importance of reinvested earnings, or what factors govern the decision of whether income earned at a foreign location is repatriated or reinvested at the foreign location". She suggests that reinvestment "warrants more attention both on theoretical level, as well as in terms of empirical study" especially given its growing quantitative importance. An extensive search of the post-2006 IB literature failed to find an empirical study focusing on determinants of reinvestment.

Therefore, the purpose of this study is to illuminate the relationship between good governance and reinvestment decisions by US multinationals in selected developing and emerging countries. Specifically, using the fixed effects regression model, this study investigates the impact of good governance in selected host countries on reinvestment decisions by US multinationals between 1994 and 2006.


A critical examination of US FDI data (from various issues of US Survey of Current Business) shows that reinvestment by United States multinational Corporations (MNCs) has increased steadily and significantly over the years, becoming the most important component of FDI. …