The purpose of this paper is to develop and test theory regarding a geographic halo effect, whereby foreign investors draw overly broad impressions about a country based on high levels of violent crime in specific locations impacting foreign direct investment (FDI) across the country.
The authors analyze the impact of homicides on FDI by source country into Mexican states from 2001 to 2015. They estimate fixed effect and dynamic panel models controlling for several determinants of FDI at the state level and the potential geographic spillover of such violence from adjacent states.
The authors find robust support for the existence of a geographic halo effect caused by violent crime. The results show that the highest number of state homicides is associated with lower FDI across states.
The research provides some evidence of the potential role of cognitive biases on FDI decisions. In addition, its focus on Latin America brings attention to an understudied region in international business research.
For practitioners engaged in FDI decisions, the results imply the need to be more aware of potential cognitive biases that may influence them.
Few papers have explored the influence of cognitive biases on FDI.
