Cost of Capital in an International Context: Institutional Distance, Quality, and Dynamics

Thomas Lindner, Jakob Muellner, Jonas Puck*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review


Cost of debt is a key cognitive anchor for managerial decisions and an important determinant of firm profitability. We extend international management research by analyzing the effects of institutional distance, institutional quality, and their dynamics on the cost of debt in the context of foreign direct investments (FDI). We test our conceptual model on a sample of companies making 3764 greenfield foreign direct investments from developed into less developed markets. Using hierarchical linear modeling, we show that the financial consequences of internationalizing into countries with weak institutions depend on both the institutional distance between countries, as well as their institutional quality. Furthermore, we find that recent changes in institutional quality form expectations about future development and ultimately influence post-investment financing costs.
Original languageEnglish
JournalJournal of International Management
Issue number3
Pages (from-to)234-248
Number of pages15
Publication statusPublished - Sept 2016
Externally publishedYes


  • Cost of debt
  • Developing countries
  • Foreign direct investments
  • Institutional perspective
  • Trade-off theory

Cite this