UK FOREIGN DIRECT INVESTMENT IN THE OECD, CULTURE AND GEOGRAPHY

Abstract

How does distance affect foreign direct investment? Subject of this research is to determine important factors for the United Kingdom, when undertaking foreign direct investment (FDI). The UK is therefore estimated as the home country of investment, investing in the form of FDI in multiple host countries. More specifically, this research measures determinants of FDI outward stock from the UK to other OECD countries. This research examines how distance affects foreign direct investment and provides twofold contribution. First: Hofstede culture distance effects on foreign direct investment is measured. Second: Geographical kilometer distance effects on foreign direct investment is measured. Methodology used in this research is based on the gravity model, presenting a model setup designed for international trade. Moreover, the research applies foreign direct investment OECD data, together with data on gross domestic product and population. The equation specification combines the economic variables with measures for geographical distances, and the Hofstede Culture measure. First regression equation estimates FDI as a function of GDP, population and Culture Distance. Second regression equation estimates FDI as a function of GDP, population and Geographical Distance. This regression setup provides a clear opportunity to estimate the difference between impact of cultural and geographical distance, represented in the estimation coefficients of the regressions. The British Empire has evolved and through time developed the British culture. Purpose of this current research is to examine how cultural distance and geographical distance impact foreign direct investment, with foreign direct investment often being an indicator of the long-term commitment of foreign investors. Furthermore, with the purpose of finding how foreign direct investment is impacted by several different cultural factors, we analyze various dimensions of the Hofstede culture. These are the power distance (PDI), individualism (IDV), the masculinity/femininity (MAS), and the uncertainty avoidance (UAI). Conclusion is that, all taken together, the research finds foreign direct investment from the UK going to other OECD countries to be more highly affected by geographical distance than cultural distance. Which is interesting considering Brexit. Potentially, this is because the UK is not so culturally different from its main trading partners in the OECD, which is an interesting subject for future research.