Official visits and foreign direct investment

Abstract

This paper examines the effect of official visits by U.S. Presidents and Secretaries of State on foreign direct investment inflows. The key difficulty in determining a causal effect is the issue of endogeneity. To address potential endogeneity, we use the Endogenous Treatment model (ETM). The estimation results provide evidence that the official visits of U.S. Presidents have a statistically significant positive effect on both foreign investment inflows from the U.S. and on total foreign direct investment inflows. This is robust even after the inclusion of other control variables identified by the literature as confounding factors for foreign direct investment. When we examine the effect of different types of visits, the results show that bilateral meetings during the official visits of U.S. Presidents have a statistically significant positive effect on both foreign investment inflows from the U.S. and total foreign direct investment. These results imply that the visits of U.S. Presidents offer a signal of the confidence of American administrations in the host country, which may in turn encourage American and non-American firms to invest in that country.