Legal system uncertainty and FDI attraction in Southeast Asia

Abstract

Purpose

The purpose of this paper is to draw from organizational ecology and institutional theory, the authors suggest that there will be a curvilinear relationship between legal system uncertainty and foreign direct investment (FDI) attraction in Southeast Asia. The authors extend theory by arguing that this is because uncertainty will provide opportunities for FDI that seek this form of operating environment, leveraging legal system uncertainty as a basis for competitive advantage.

Design/methodology/approach

The authors test and find support for the hypotheses using FDI data from nine Southeast Asian countries for the years 1995-2005.

Findings

In this paper, the authors hypothesize and find that the relationship between legal system uncertainty and FDI attraction is curvilinear in nature, such that FDI attraction decreases with legal system uncertainty down to an inflection point, but then increases beyond this point; and that the relationship between legal system uncertainty and FDI attraction is moderated by government intervention in the host country economy, such that the strength of this relationship is greater when government intervention is high rather than when it is low. Implications of the findings and suggestions for future inquiry are presented.

Originality/value

Conventional wisdom suggests that legal system uncertainty will negatively affect FDI attraction. However, to date, research on the effects of legal system uncertainty on FDI attraction in emerging markets has received very little attention. The aim of this research study is to shed new light on how, under certain conditions, legal system uncertainty will attract FDI in Southeast Asia.

Citation

White III, G.O., Chizema, A., Canabal, A. and Perry, M.J. (2015), "Legal system uncertainty and FDI attraction in Southeast Asia", International Journal of Emerging Markets, Vol. 10 No. 3, pp. 572-597. https://doi.org/10.1108/IJoEM-11-2013-0184