Proximity and the distribution of foreign direct investment stock

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The relevance of the concept "proxemics" to understand social distance and the resulting patterns of behavior among participants has been recognized in social psychology. This concept may also be useful to examine certain patterns of behavioral interactions among economic agents. As a test case, we have applied this to study patterns of behavior in international economic relations relating investors and hosts of foreign direct investment (FDI). This brief note is a report of some preliminary findings of an ongoing research along this line. One fact about the distribution of the stock of a country's FDI is that its hosts with a relatively larger share are found in proximity to it. For example, the U.S. has the largest share of the total FDI stock in Canada. Japan ranks at the top in relation to the share of FDI stock in South Korea. Similarly, the U.K. is the biggest single provider of FDI in the Irish Republic. Evidences abound. In an attempt to explain these phenomena, we have constructed a model in which economic, political, geographic, and socio-cultural proximity factors are being incorporated. To test the model, we have used data on the distribution of the stock of U.S. FDI in 1978. As only 25 countries accounted for about 80 percent of the total stock [Source: Obie G. Whichard,"U.S. Direct Investment Abroad in 1979," Survey of Current Business, August 1980, p. 26, Table 12], these countries are the empirical base of this experiment. The explanatory variables are per capita GNP in 1977 (a measure of economic proximity), distance (a measure of geo-political proximity), language (a proxy variable for socio-cultural proximity which takes the value of 1 if English is the official language of a host country and 0 otherwise), and population in 1977 (a measure of market size proximity). The source of data for distance is C. L. Taylor and M. Hudson's World Handbook of Political and Social Indicators [New Haven: Yale University Press, 1972] pp. 350-52. Various UN publications are the sources of data for the rest of explanatory variables.