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<p>This study draws on institutional economics and communicative institutionalism to conceptualise language as an institution which comprises socially shared rules and meanings that govern human interaction and affects country-level foreign direct investment (FDI). Specifically, shared language governs interpretation and coordination in cross-border investment relationships, thereby reducing behavioural and environmental uncertainty. In turn, language differences weaken this institutional function of language. To test this hypothesis, we employ a gravity model of 87,209 bilateral FDI observations comprising equity and debt positions across 246 countries and territories from 2010 to 2019. We find that greater language differences are associated with lower bilateral FDI stocks. We further show that formal institutional proximity and cultural proximity mitigate this negative association, offering alternative mechanisms for uncertainty reduction when language differences are large. In addition, language difference from English is negatively associated with FDI for both source and host countries. Overall, the study demonstrates that language functions as a key institutional determinant&#xa0;of FDI, extending language-sensitive IB research and institutional explanations of cross-border investment.</p>

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Word of Investment: The Role of Language as an Institution in FDI

  • 期刊论文

  • 出版模式：

    开放获取

  • 发表日期：

    2026年7月21日

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  • Sougand Golesorkhi,
  • Grigory Pishchulov,
  • Trond Randøy

摘要

This study draws on institutional economics and communicative institutionalism to conceptualise language as an institution which comprises socially shared rules and meanings that govern human interaction and affects country-level foreign direct investment (FDI). Specifically, shared language governs interpretation and coordination in cross-border investment relationships, thereby reducing behavioural and environmental uncertainty. In turn, language differences weaken this institutional function of language. To test this hypothesis, we employ a gravity model of 87,209 bilateral FDI observations comprising equity and debt positions across 246 countries and territories from 2010 to 2019. We find that greater language differences are associated with lower bilateral FDI stocks. We further show that formal institutional proximity and cultural proximity mitigate this negative association, offering alternative mechanisms for uncertainty reduction when language differences are large. In addition, language difference from English is negatively associated with FDI for both source and host countries. Overall, the study demonstrates that language functions as a key institutional determinant of FDI, extending language-sensitive IB research and institutional explanations of cross-border investment.