Nation Brands and Foreign Direct Investment*

Abstract

This article studies the explanatory power of intangible factors - such as country stereotypes and consumer perceptions - for the size of foreign direct investment (FDI) flows, controlling for fundamental variables. To operationalize the concept of these intangibles we use the idea of the 'nation brand'. Nation brands are strongly related to the idea of 'country-of-origin' biases for both industrial and consumer products. It is known that the 'country-of-origin' serves often as a product characteristic, an informational cue, but also as a means of applying a heuristic for simplified decision-making. Given its role for purchase decisions, the size and direction of the country-of-origin bias should be important for multinational investors when choosing the location of production, and everything else given, investors should choose as their location of production countries to which consumers show a positive country bias. In a similar spirit, the strength of nation brands may be used as a heuristic or a source of information about the quality of a country as an investment decision. Using the EUROSTAT data on FDI flows from 30 source countries to 34 host countries for the years 2005 and 2006 and the Anholt Nation Brands Index as our measure of these intangibles, we find that this index has a significant and strong impact on FDI flows in a multivariate analysis that is based on the knowledge-capital (KC) model of FDI. The volume of FDI into a host country is shown to rise by 27 percent as its nation index, the measure for the quality of these intangibles, improves by one point. Among the six components of the index, the perceptions about a country's products, about its social and economic conditions and about cultural aspects are most relevant. Our results suggest that the nation brands index accounts for important aspects of FDI decisions that are not captured in fundamental data which explain FDI in the standard foreign trade approach to FDI. © 2010 Blackwell Publishing Ltd.