Familiarity Breeds Investment: Diaspora Networks and International Investment

TLDR

Existing theories attribute cross‑border investment to policy credibility, but this study highlights diaspora networks as a key factor. The study seeks to explain cross‑national patterns of portfolio and FDI by testing whether diaspora networks reduce transaction and information costs. The authors test the hypothesis with dyadic cross‑sectional data on portfolio and FDI. Results show that diaspora networks significantly influence cross‑border investment even after controlling for many factors.

Abstract

What explains cross-national patterns of international portfolio and foreign direct investment (FDI)? While existing explanations focus on the credibility of a policy maker's commitment, we emphasize the role of diaspora networks. We hypothesize that diaspora networks—connections between migrants residing in investing countries and their home country—influence global investment by reducing transaction and information costs. This hypothesis is tested using dyadic cross-sectional data for both portfolio and FDI. The findings indicate that even after controlling for a multitude of factors, disapora networks have both a substantively significant effect and a statistically significant effect on cross-border investment.