Abstract
Cross-country differences in macroeconomic and institutional environments are used to explainMNE behavior, as proxied by
foreign direct investments (FDIs) in?ows to seven Latin American countries, namely Argentina, Brazil, Chile, Columbia,
Mexico, Peru and Venezuela for the period 1988–1999. Results indicate that the institutional approach is dominant, thus
supporting recent FDI research that has included statistical measures of institutional reform in their models. Since MNEs must
conform to the institutional environment prevailing in the host country, managers should undertake FDI where there is minimal
institutional distance between the home and the host country environments. In addition, government of?cials should place
increased emphasis on institutional reform if their objective is to increase inward FDI in their countries. Finally, any assistance
provided by non-governmental organizations, such as the IMF and theWorld Bank, should also emphasize institutional reform.
# 2004 Elsevier Inc. All rights reserved.
1. Introduction
The opening of markets in developing countries in
recent years has brought with it burgeoning foreign
direct investment (FDI) ?ows. In the 1990s, FDI
became the largest single source of external ?nance
for developing countries. By 1997, FDI accounted
for about half of all private capital and 40% of total
capital ?ows into developing countries. In the past,
governments in many developing countries often saw
multinational enterprises (MNEs) as part of the devel-
opment problem, due to assertions of exploitation of
the environment and of the labor force. At present,
MNEs are seen as part of the development solution for
several reasons. First, governments in developi ...