Determinants of foreign direct investment from Europe to Asia

Abstract

AbstractThis study examines the determinants of foreign direct investment (FDI) from Europe to Asia based on the knowledge‐capital model. The data include 38 European countries and 24 host Asian countries over the period 1995–2013. Empirical evidence from Poisson‐pseudo maximum likelihood estimation method is in line with hypothesised predictions derived from the knowledge‐capital model. In particular, the total income and the similarity in market size between two countries encourage horizontal FDI. We also find empirical support to vertical FDI in Asia where the difference in skilled labour endowments between European source and Asia host countries has a positive impact on FDI from Europe to Asia. Meanwhile, investment costs in Asian countries, trade costs to both source and host countries, and exchange rate volatility are negatively correlated to FDI. By contrast, sharing a common language, a bilateral investment treaty and a historical colonial relationship encourage FDI from Europe to Asia. In addition, heterogeneities in host countries’ geographical regions, exchange rate regimes, and governance system, and source countries’ Eurozone membership lead to differences in empirical findings. The results also signal some future trends and the roles of governments in both source and host countries in facilitating FDI.