The IUP Journal of Management Research
Does Geographical Proximity of the Host to the Domestic Country of Investors Reduce Informational and Managerial Uncertainty?

Article Details
Pub. Date : April, 2021
Product Name : The IUP Journal of Management Research
Product Type : Article
Product Code : IJMR10421
Author Name : Jaime Cahill and Carolan McLarney
Availability : YES
Subject/Domain : Arts & Humanities
Download Format : PDF Format
No. of Pages : 13

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Abstract

This paper scrutinizes the effects of geographic proximity of the host region to the domestic country of the investor, and the results indicate that determinants such as language and opposing cultural or political systems may be indirectly responsible for the increase in uncertainty concerning geographic distance. The paper shows that holding these factors constant nearly eliminated location bias in terms of proximity, because regardless of the distance, investment opportunities appeared equally as likely or favorable to potential investors. The key finding is that FDI location behavior varies between sectors. For industries concerned with the development of tangible goods, such as manufacturing businesses, geographic distance has a prominent impact on the degree of uncertainty and so closer proximities are preferred and encourage larger amounts of inward FDI. Industries involved in the output of intangible goods experience less informational and managerial uncertainty with increasing geographic distance between investing parties, as knowledge-transfer presents less costs and risk.


Introduction

Foreign Direct Investment (FDI) is a function of many elements, with the geographic location of the host country serving as a crucial determinant. Historically, the farther a host country was from a domestic investor, the less inward FDI they would receive. This was primarily because the amount of time it took to obtain new information increased with geographic distance, spurring uncertainty and increasing costs (Ali and Guo, 2005).

Today, notable advancements in transportation and communication technology beg the question of whether geographic proximity of the host to the domestic


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