Working Paper: NBER ID: w25933
Authors: Bruce A. Blonigen; Anca D. Cristea; Donghyun Lee
Abstract: A proposed reason for the significant inverse relationship between distance (both physical and cultural) and foreign direct investment is the increased costs for a parent firm to monitor an affiliate when there is greater distance between them. We provide the first direct test of this hypothesis using O*NET data on occupational skills to construct industry-level measures of the importance of monitoring-related skills. We then exploit this cross-industry variation to examine whether physical and cultural distances have a greater impact on cross-border M&A in industries where monitoring-related skills are more important. Using data on worldwide cross-border M&A activity from 1985 through 2014, we find significant evidence for the effect of monitoring costs on cross-border M&A activity. We also show that the relatively low importance of monitoring-related costs in manufacturing industries compared to those in other sectors is an important factor in explaining why cross-border M&A in manufacturing is so large despite its relatively small share of the modern economy.
Keywords: Foreign Direct Investment; Monitoring Costs; Cross-Border Mergers and Acquisitions; Distance; O*NET
JEL Codes: D22; F21; F23; G34; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased monitoring importance in an industry (K23) | decrease in cross-border M&A activity (F69) |
| greater physical distance (R12) | increased monitoring costs (G18) |
| increased monitoring costs (G18) | decrease in cross-border M&A activity (F69) |
| physical distance (R12) | increase in monitoring costs (G18) |
| cultural distance (Z10) | increase in monitoring costs (G18) |
| monitoring importance interacts with bilateral physical and cultural distance (Z13) | influence FDI decisions (F23) |