Escape FDI and the dynamics of a cumulative process of institutional misalignment and contestation: Stress, strain and failure

What is it about?

When is internationalization a form of escape FDI? We see escape FDI as a consequence of societal contestation or institutional misalignment with firms – when the future productive capacity of the country is not evident. Adapting the stress-strain-fail model of materials failure, we argue that escape FDI is a process with three cumulative phases. Conditions for escape FDI (stress) are created by institutional deterioration and contained contestation. Limited escape FDI (strain) results from periods of societal instability and/or inadequate institutional reforms. Extensive escape FDI (failure) results from pervasive societal instability and/or fundamental changes in institutions. Using a historical approach, we develop these propositions for South Africa, 1956 to 2012.

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Why is it important?

We suggest a more precise conceptualization of escape FDI. We define escape FDI as FDI that occurs when firms seek to limit their exposure to a home country because unknown future “rules of the game” (i.e. institutional arrangements) call into question the perceived potential productive capacity of the economy. We argue that three elements need to receive attention: the role of institutional misalignment, which we argue results from changes in institutions rather than their weakness (even though profound changes often happen in institutionally weak contexts), the role of societal contestation, and finally the fact that escape FDI is a cumulative process. Therefore funds leave the country either during severe societal tension or during (the often coinciding) reform processes. We contribute to a richer understanding of escape FDI, and in so doing, also document the role of the home country in internationalization. We suggest that scholarship can advance more precisely if the misalignment with rather than weakness of institutions is emphasized.