The effects of institutional distance on FDI inflow: General environmental institutions (GEI) versus minority investor protection institutions (MIP)

• Our typology suggests that there is a significant difference between general environmental institutions (GEI) and minority investor protection institutions (MIP).
• FDI would be negatively correlated to the gap between the home and host country in GEI.
• FDI is associated positively with the institutional gap between the home and host country in MIP.

Existing research suggests that foreign direct investment (FDI) flows into countries with good institutional infrastructure. We distinguish between general environmental institutions (GEI) that promote societal interests at large, and minority investor protection (MIP) institutions that promote the interests of a specific group, and argue that these types of institutions affect international investments differently. We tested this hypothesis by examining the effects of institutional distance on international M&A activities of US firms during 1981–2008. We found that better GEI in the host country attracts inflowing FDI while better MIP may discourage it, because of the perception that it reduces the potential gain an acquiring firm can earn from an international acquisition in that country.