Determinants of Outward FDI: Empirical Analysis of OECD Source Countries

Abstract

The study analyzes the relationship between outward foreign direct investment (OFDI) stocks pertaining to 34 OECD source and 160 destination countries. The principal findings are: (i) The gravity model variables explain nearly 50 per cent of the variation in the OFDI stock. (ii) Common language and colonial linkages explain further variations in OFDI stock, over the gravity model. (iii) Index of revealed comparative advantage of natural resources for source country bears positive relation with OFDI. (iv) Common currency between source and destination country lowers transaction costs and reduces risk in transactions thus increasing OFDI level.