Home bias persistence in foreign direct investments

Abstract

The purpose of this paper is to analyse the issues related to home bias and foreign direct investments. We study the role of physical, cultural, and institutional distances from home on foreign direct investment decisions taken by corporations to assess whether the globalization of the past two decades has reduced their influence. Using the "home bias" framework from the finance literature and the gravity model from the economics literature, we utilize a large sample of both developed and emerging markets, using foreign direct investment (FDI) flows of 6,263 unique bilateral country pairs over a 30-year period. We find strong empirical evidence of persistent home bias in FDI outflows, and we show that not only physical distance but also cultural and institutional similarities between host and source countries remain a decisive factor in foreign corporate investment decisions. We also show that such home bias is persistent over time and is observed around the world.

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“…I worked with several former Ph.D. students and colleagues on biases in investor behaviour. For example we observed home bias among foreign direct investors (Levis et al , 2015), insufficient diversification among individual investors (Fuertes et al , 2014) and overconfidence (Muradoglu and Onkal, 1994, 1996; Onkal and Muradoglu, 1994) especially among stock market professionals. To our surprise we observed the so-called inverse expertise effect, that expert forecasts were not as good as novices presumably due to their complex cue utilization.…”

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