Abstract
The aim of this paper is to test for the relevance of spatial linkages for Dutch (outbound) FDI. To do so, and based on recent FDI theories, we estimate a spatial lag model to assess the importance of spatial linkages for Dutch FDI to 18 host countries. As a determinant of FDI, space or geography also enters our empirical analysis through the market size and a corporate income tax variable. Our paper is among the few to date to take spatial linkages with respect to FDI into account. The Dutch case is also interesting because Dutch firms account for a large part of global FDI and related research has so far focused mainly on US FDI. After controlling for fixed effects, we find for our sample period 1984-2004 that third country effects matter, but the results are somewhat sensitive to sample and model selection. Apart from our benchmark spatial lag model, we discuss and estimate various alternative models notably by looking at European host FDI countries only, by dividing FDI into industry and services FDI and by estimating a spatial error model as well.
Highlights
Since the 1980s, foreign direct investment (FDI) has grown at a remarkable rate, reaching a peak in global FDI inflows of almost 1,400 billion US$ in 2000 (UNCTAD 2006)
Point to the fact that apart from channels identified by FDI theory there must be other channels through which shocks to Dutch FDI to third country j can influence the Dutch FDI to country host country i
Informed by FDI theory, a spatial lag model was introduced to test for the relevance of third-country effects in Dutch outbound FDI
Summary
The omission of third-country effects may lead to biased, inconsistent or inefficient parameter estimates, a too high R2 statistic or incorrect inferences (see Anselin (1988) for an overview of the econometric problems in the presence of spatial effects). Given these potential weaknesses, the aim of this paper is to test for the relevance of these spatial linkages. For 12 of our 18 host countries we estimate the spatial lag model when the FDI data are split into industry and services FDI.
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