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Familiarity Breeds Investment: Migrant Networks and Cross-Border Capital
Unformatted Document Text:  2 countries with high quality institutions or that are members of a large number of international agreements may have difficulty accessing international capital markets. Consider the relationships in figures 2 and 3 which plot the log of portfolio investment against indicators of domestic and international commitments for the year 2002. In the aggregate these figures show a positive relationship between portfolio investment and these institutions. 2 But for every India -- high on both investment and institutions -- there is a China -- high on investment but low on institutions. While not dismissing the importance of institutions, we argue that investors are faced with tremendous asymmetries of information when considering alternative investment environments. Investors may not know about investment opportunities within various countries. Further, investors may not know the extent to which policy makers in particular countries are committed to protecting foreign investment. We argue that migrant networks-- connections between migrant communities in the investing country and the migrant’s country of origin--facilitate cross-border investment by decreasing information asymmetries. Because migrants have specific information about language, customs, culture, and regulations in potential markets, they help resolve informational hurdles associated with cross-border investment. Further, because migrants are dispersed across a wide range of countries they can act as an enforcement mechanism, steering investment towards stable markets and directing it away from others. Finally, migrant networks can help separate relevant information from noise--something especially important in an environment when investors are bombarded with massive amounts of information on a daily basis. We examine the effect of migrant networks on cross-national investment patterns using a dyadic data set composed of investment from 58 source countries into 120 destination countries 2 The bivariate correlation between the log of investment and the democracy score (using the POLITY score) is 0.61; the bivariate correlation between investment and the total number of preferential trade agreements is 0.56.

Authors: Leblang, David.
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countries with high quality institutions or that are members of a large number of international
agreements may have difficulty accessing international capital markets. Consider the
relationships in figures 2 and 3 which plot the log of portfolio investment against indicators of
domestic and international commitments for the year 2002. In the aggregate these figures
show a positive relationship between portfolio investment and these institutions.
2
But for every
India -- high on both investment and institutions -- there is a China -- high on investment but
low on institutions.
While not dismissing the importance of institutions, we argue that investors are faced with
tremendous asymmetries of information when considering alternative investment
environments. Investors may not know about investment opportunities within various
countries. Further, investors may not know the extent to which policy makers in particular
countries are committed to protecting foreign investment. We argue that migrant networks--
connections between migrant communities in the investing country and the migrant’s country
of origin--facilitate cross-border investment by decreasing information asymmetries. Because
migrants have specific information about language, customs, culture, and regulations in
potential markets, they help resolve informational hurdles associated with cross-border
investment. Further, because migrants are dispersed across a wide range of countries they can
act as an enforcement mechanism, steering investment towards stable markets and directing it
away from others. Finally, migrant networks can help separate relevant information from
noise--something especially important in an environment when investors are bombarded with
massive amounts of information on a daily basis.
We examine the effect of migrant networks on cross-national investment patterns using a
dyadic data set composed of investment from 58 source countries into 120 destination countries
2
The bivariate correlation between the log of investment and the democracy score (using the POLITY score) is
0.61; the bivariate correlation between investment and the total number of preferential trade agreements is 0.56.


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