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Investor Protection and Real Investment by U.S. Multinationals

Published online by Cambridge University Press:  06 April 2009

Eric Kelley  and
Tracie Woidtke
Eric Kelley
Affiliation:
ekelley@eller.arizona.edu, Eller College of Management, University of Arizona, Tucson, AZ 85721
Tracie Woidtke
Affiliation:
twoidtke@utk.edu, Department of Finance and Corporate Governance Center, University of Tennessee, Knoxville, TN 37996.
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Abstract

In spite of the growing research concerning investor protection, the relation between investor protection and real investment by foreign multinationals is largely unexplored. Recognizing this relation, however, is especially important in light of the surge in cross-border activity in recent decades and the potential impact cross-border investment can have on a country's economic development. We find that U.S. multinational foreign investment is significantly greater both when shareholder protection is poor and when creditor protection is poor. Consistent with existing literature, our results suggest that U.S. firms have greater comparative advantages when local firms in poor investor protection countries either i) invest suboptimally due to agency problems or ii) have constrained access to debt capital. The increased investment by U.S. multinationals in poor investor protection countries is of particular interest, because it suggests an important way in which adverse outcomes related to poor investor protection may be mitigated.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 3 , September 2006 , pp. 541 - 572
Copyright
Copyright © School of Business Administration, University of Washington 2006

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