Bilateral Foreign Direct Investment Research Articles

Global bank linkages and foreign direct investment

This study explores the impact of bank networks on foreign direct investment (FDI) using data on country pairs. Global bank linkages are quantified by the number of connected bank pairs engaged in international lending between the source and host countries. The empirical analysis reveals a positive correlation between bank linkages and bilateral FDI stocks. We interpret this relationship as indicating that bank connections facilitate FDI by addressing information asymmetry stemming from factors such as uncertainty, global financial crises, or host country shocks. Our findings remain robust across various robustness checks. This research suggests that governments should promote cross-border bank investments to attract FDI.

The gravity of Offshore Financial Centers: Estimating real FDIs using a binary choice model

Fiscal and regulatory arbitrage opportunities in Offshore Financial Centers (OFCs) materially distort the economic analysis based on cross-border capital flows. However, despite its significance, there is limited information on the true scale of this phenomenon. This paper focuses on Foreign Direct Investments (FDIs) and fills this gap by using an extensive list of FDIs determinants and estimating a gravity-like binary choice specification to assess how much bilateral FDIs are driven by economic integration motives versus profit shifting opportunities. We find that the share of so-called phantom FDIs, after rising in 2010–15, stabilized at around 40% of total FDIs in recent years and that this share is systematically larger in OFCs, reconciling available evidence on the abnormal amount of recorded FDIs in these countries.

Drivers of bilateral FDI inflows in North Africa region: a gravity model approach

Purpose- This paper aims to explore the main determinants of bilateral foreign direct investment (FDI) and investigate the relationship between bilateral trade and FDI inflows in five North African countries with 25 investment partners. Methodology- The study employs a gravity model and pooled time-series-cross-sectional regression method, utilizing a 10-year average over the period 2001-2010, the significance of this research lies in its contribution to the existing literature as the first study to analyze the factors influencing bilateral FDI inflows between North African countries and their primary investing partners. Findings- The results indicate that bilateral trade, economic size, financial development, and common language of host countries are key drivers of bilateral FDI inflows between North African countries and other nations. Furthermore, the presence of a common language between host and home countries has a significant and positive impact on bilateral FDI. However, the distance between host and home countries has a negative effect on FDI. Conclusion- This paper concludes that foreign direct investment (FDI) between North Africa and other nations was influenced positively by the economic sizes of both the home and host countries while being negatively affected by the physical distance between them. Additionally, the results demonstrate that the presence of a common language and bilateral trade play crucial roles, with their effects being highly positive and significant. This suggests that FDI flows tend to be greater between North African countries and those with whom they already have substantial bilateral trade transactions. Furthermore, the study concludes that France, the United Arab Emirates, Spain, and Kuwait are the most significant investing countries in the North African region in terms of FDI, surpassing other nations. Keywords: Bilateral FDI inflows, bilateral trade, gravity model, North Africa, geographical and culture factors. JEL Codes: F14, F21, F40, F30, F15

Do greenfield FDI inflows promote international tourism?

ABSTRACT To what extent do Greenfield foreign direct investment (FDI) inflows to emerging markets and developing economies drive their tourist inflows? Using a novel dataset on bilateral Greenfield FDI, this study is the first to empirically investigate the impact of bilateral Greenfield FDI on bilateral tourist flows. The analysis is based on a large cross-country dyadic dataset comprising 103 origin countries and 63 destination countries over the period 2003–2017. The findings robustly establish that greater flows of bilateral Greenfield FDI stimulate bilateral tourism flows, and this effect is stronger for country pairs that are linguistically further apart and/or with greater physical distance. These findings are not susceptible to potential endogeneity issues.

Tax Cost: Does It Deter Foreign Direct Investment (FDI)?

Yes, it does. My study investigates the question, ‘does tax cost deter FDI?’ by employing a rich dataset of bilateral FDI between the OECD developed countries and developing countries. The argument posed in the study is – ‘tax cost deters FDI as it straightway reduces the profitability of multinational firms’. The contribution of the study to the empirical literature of international economics is noteworthy. It adds to the literature by estimating the partial effect of tax cost on FDI while drawing on the gravity framework as its analytical approach. By utilizing the empirical exercise, the study draws the inference that the tax cost indeed substantially deters FDI. Furthermore, the study explores – ‘how does parent’s tax system – the worldwide tax system and the territorial tax system affect the sensitivity of FDI to tax cost?’ The study affirms that FDI reacts differently depending on the parents’ tax system. The study also examines the effect of host-country differences on the responsiveness of FDI to tax cost. Additionally, the study also empirically validates the ‘regionalists’ argument’.

Main Trends in the Development of Economic Relations Between Japan and People’s Republic of China in the XXI Century

This article is devoted to the study of economic relations between Japan and the PRC in 2000–2020. The main indicators of bilateral trade, its structure, indicators of bilateral foreign direct investment between Japan and the PRC are presented and analyzed in the article. An assessment of the current state of Japanese-Chinese economic relations was given, factors affecting their development over the past 20 years were determined using the method of generalization of research materials, methods of comparative and correlation analysis of data, analytical method of information processing. The authors conclude that during the period under review, economic cooperation between Japan and China in trade and investments is expanding and strengthening, and their economic interdependence is increasing. The interest of Japanese corporations in carrying on business and opening branches in the PRC is indicated as the main factor of development. Political instability in bilateral Japanese-Chinese relations is indicated as a deterrent. The authors emphasize that in order to further increase the successful and stable development of economic partnership, the two states need to take specific steps for the purpose of political rapprochement and finding a compromise on controversial issues.

How bilateral foreign direct investment influences environmental convergence

AbstractThis paper analyzes environmental convergence and its determinants. We construct our analysis in a bilateral setting and hypothesize that, through foreign direct investment (FDI), one or more investor countries could impact the environmental performance of their hosts, leading thus to a possible environmental convergence between home and host economies. To do this, we construct an original database on bilateral FDI encompassing 128 countries for the period 2000–2012. Our results suggest that, in general, FDI does not directly impact environmental convergence, except for the case of FDI originating from major investor countries. Under specific conditions, FDI can be expected to influence environmental convergence along with other variables such as GDP per capita, industrial development, geographical proximity, or cultural and historical ties. Overall, these effects may vary depending on the type of partnership considered (North–North, North–South, South–North, and South–South).

Does it matter where your ancestor come from? Genetic distance and bilateral foreign direct investment

AbstractThis paper selects 141 countries from 2009 to 2020 to investigate the impact of genetic distance on bilateral foreign direct investment (FDI). Through theoretical and empirical analysis, we get the following conclusions. First, genetic distance has a significant negative impact on bilateral FDI by increasing transaction costs. This conclusion still holds after several robust checks. Second, genetic distance has different effects on bilateral FDI for different countries: (1) If at least one of the two countries is a low‐income country, genetic distance will have a significant negative impact on their FDI, but no significant impact on both high‐income countries; (2) if at least one of the two countries is not a member of the Belt and Road Initiative, genetic distance will have a significant negative impact, but no significant impact on both member countries; and (3) genetic distance has a significant negative impact only when both countries are World Trade Organization members. Third, further analysis shows that a smaller genetic distance has no significant effect on bilateral FDI, and only when the genetic distance is larger than the average would a significant negative impact exists. This paper provides policy recommendations for promoting bilateral investment.

Corruption distance discourages bilateral FDI … Unless you’re high: The moderating effect of direction

This study investigates the impact of corruption, corruption distance, and corruption direction on bilateral foreign direct investment (FDI) outflows using reporting OECD Global North and Global South countries. We first posit that corruption and the absolute difference in corruption levels across a pair of countries are negatively related to a host country's level of FDI. Then we investigate the moderating effect of direction when investing in a more corrupt host country. A PPML gravity model for a panel of 5733 different North and South country pairs over the years 1998–2018 indicates both the presence of corruption and a high corruption distance between country pairs has negative effects on FDI outflows, but investing in the direction of a more corrupt host country has a positive moderating effect. Our results contribute to expand and complement the theories on corruption in FDI.

Corruption, formal institutions, and foreign direct investment: The case of OECD countries in Africa

AbstractPurposeCorruption has shown a mixed impact on foreign direct investment (FDI). This study proposed moderating the role of two—foreign aid (international institution) from the home country and democracy (national institution) in the host country—between corruption‐FDI nexus.MethodologyThe framework is analyzed using panel data analysis (2001–2018) of bilateral foreign aid and FDI from 18 European members of the Organization for Economic Cooperation and Development (OECD) to 34 African countries.FindingsThe presents several key findings. First, Africa's level of government corruption harms bilateral FDI from Europe. Second, the OECD's bilateral foreign aid moderates the negative effects of Africa's host‐country corruption on FDI. Third, the level of democracy in the host country also moderates the negative impact of corruption on FDI. Finally, foreign aid strongly moderates the negative effect of corruption on FDI in democratic countries compared to non‐democratic host countries.Research ImplicationsThis study provides the institutional analysis that bilateral foreign aid and democracy as formal institutions affect the European multinational enterprises's decision to invest in Africa.Practical ImplicationsIt presents the policy and managerial implications. First, European MNEs managers avoid investing in Africa, and governments must take strict actions to attract FDI. Second, foreign aid and democracy motivate MNEs to invest in Africa. Finally, the OECD policymaker could formulate rigorous and relevant conditions for foreign aid to Africa to reduce corruption.Originality/ValueThrough the lens of institutional theory and selectorate theory, the novel institutional role of foreign aid and democracy is proposed and tested between the nexus of corruption‐FDI.

Investment effect of regional trade agreements: an analysis from the perspective of heterogeneous agreement provisions

Global regional trade agreements (RTAs) are experiencing unprecedented rapid development in terms of number and content of provisions, and China’s RTAs are no exception. With the increase in the depth of RTA provisions, as an important form of economic and trade relations between countries, investment is bound to be affected. Taking the RTAs signed by China as the research object and using the bilateral foreign direct investment (FDI) data provided by the International Monetary Fund CDIS database and the relevant data from the World Bank RTA text depth database, this paper constructs various indexes to measure the depth of RTA provisions and analyzes the effects of changes in the depth of RTA provisions on inward FDI stocks to China. The study finds that the improvement of all four depth indexes, namely, total depth, core depth, depth of WTO+ provisions, and depth of WTO-X provisions, significantly promotes China’s inward FDI stocks. This conclusion still holds after a series of endogenous problem analysis and robustness tests. Further analysis shows that the improvement of the depth of RTA provisions has a relatively greater effect on FDI stocks from developing countries and countries along the “Belt and Road”. At the same time, there exists significant heterogeneity in the effects of different RTA provisions on the FDI stocks. The insights that we obtain in this paper enable us to provide policy recommendations for the construction of China’s global high-standard free trade agreement (FTA) network.

Epidemic outbreak and foreign direct investment fluctuation

AbstractThis paper studies how foreign direct investment (FDI) inflows will fluctuate when the host country is hit by an epidemic outbreak. By analysing historical outbreak and bilateral FDI data from 2001 to 2012, we find FDI inflows during an outbreak are 21.5% below the pre‐outbreak average and 21.6% above the pre‐outbreak average FDI inflows in the 3 years after the end of an outbreak, which highlights the compensatory FDI after the end of epidemic and implies the uncertainty mechanism. We confirm the validity of the uncertainty mechanism, which converts the health shock into risk factors in the real economy, by studying the industry‐level heterogeneity and showing that the M&A in industries with lower redeployability is more sensitive to epidemic outbreaks. Finally, we explore country‐level heterogeneity that may influence the relationship between epidemic outbreaks and FDI inflows. We find that countries with poor medical conditions suffer greater decreases in FDI inflows during outbreaks, and countries with poorer institutional quality do not experience compensatory FDI after an outbreak ends.

The Effect of COVID-19 on Foreign Direct Investment

ABSTRACT This study empirically examines how the coronavirus disease (COVID-19) has impacted foreign direct investment (FDI), using the quarterly data on bilateral FDI flows from 173 home to 192 host economies from the first quarter of 2019 to the second quarter of 2021. The severity of COVID-19 in host economies adversely affected FDI in the manufacturing sector regardless of the entry mode, but the effect of home economies’ COVID-19 situation on FDI was insignificant. On the other hand, in the services sector, the severity of COVID-19 in both host and home economies has significantly negative impact on greenfield FDI, not on cross-border M&A.

Uloga bilateralnih investicionih sporazuma u podsticanju internacionalizacije preduzeća u Srbiji

Bilateral investment treaties are traditionally considered to be an instrument for attracting foreign direct investment in Serbia. However, their provisions may also support the internationalization of its enterprises. In this paper, we explore how effective bilateral investment treaties are in promoting the most challenging aspect of the internationalization of enterprises in Serbia -foreign direct investment outflows. Additionally, we investigate the role of other main motivations for the investment outflows. We conduct our analysis by estimating a gravity model using the panel data on Serbia and its 147 partner economies, observed in the period between 2011 and 2019. The gravity model was estimated using the Poisson pseudo-maximum likelihood estimator. We find that bilateral investment treaties have a statistically significant positive effect on bilateral foreign direct investment outflows. Furthermore, the outflows are particularly affected by the treaties containing higher anti-discrimination standards and providing a more liberal investment regime. Unilateral liberalization of the host countries' investment regime is also found to be positively associated with the investment outflows, whereas both the geographic and psychic distances have negative effects. Market-seeking motives of the internationalizing enterprises in Serbia are revealed to be the dominant driver of the investment. The results provide useful implications for the policymakers aiming to support the internationalizing efforts of the enterprises and the consequent improvement of the international competitiveness of Serbian economy.

Pandemic arbitrage in foreign direct investments: A perspective on the modes of entry

ABSTRACT Foreign direct investments (FDI) are considered long-term and less sensitive to global shocks as they involve large amounts of capital investment that are costly to reverse. This study examines whether there was a reallocation of FDI flows from destination markets more affected by the pandemic, resulting in a pandemic arbitrage. Using bilateral FDI inflows data from January 2019 to December 2020, we show that FDI flows declined to destination markets that performed worse than source markets in COVID-19 infection rates, with the effect more evident in greenfield FDI. Our results also show that bilateral colonial ties and destination market COVID-19 policy stringency impact the pandemic arbitrage in FDI flows, especially for M&As.

How do foreign direct investment flows affect carbon emissions in BRICS countries? Revisiting the pollution haven hypothesis using bilateral FDI flows from OECD to BRICS countries

Foreign direct investment (FDI) flows from developed to developing countries may increase carbon emissions in developing countries as developing countries are seen as pollution havens due to their lenient environmental regulations. On the other hand, FDI flows from the developed world may improve management practices and advanced technologies in developing countries, and an increase in FDI flows reduces carbon emissions. Most of the existing studies examine the relationship between FDI flows and carbon emissions by using aggregate FDI flows; however, this paper contributes to the literature by analyzing the impact of FDI flows on carbon emissions in Brazil, Russia, India, China, and South Africa (BRICS) between 1993 and 2012 using bilateral FDI flows from eleven OECD countries. According to our empirical results, from which OECD country FDI flows to BRICS countries matters for carbon emissions in BRICS countries. Our results confirm that FDI flows to BRICS countries from Denmark and the UK increase carbon emissions in BRICS countries, confirming the pollution haven hypothesis. On the other hand, FDI that flows from France, Germany, and Italy reduced carbon emissions in the BRICS countries, confirming the pollution halo effect. FDI flows from Austria, Finland, Japan, Netherlands, Portugal, and Switzerland have no significant impact on carbon emissions in BRICS countries. The BRICS countries should promote clean FDI flows by reducing environmental damages, and investing countries should be rated based on their environmental damage in the host countries.

The hidden cost of global economic integration: How foreign investment drives military expenditures

The global economy is increasingly integrated, with more than 60,000 international firms now directing almost one million foreign affiliates worldwide. We examine one significant, and largely unexplored, aspect of this integration – the cost of protecting these global investments. More specifically, we assess the extent to which foreign direct investment (FDI) drives military expenditures. Drawing from recent studies, we adopt a social network framework. Using data from the United Nations Conference on Trade and Development’s Bilateral FDI Statistics and the International Monetary Fund’s Coordinated Direct Investment Survey, we construct the global FDI network between 2001 and 2017 and derive out-degree centrality scores based on each country’s structural location in this network. Next, using data from the Stockholm International Peace Research Institute, we estimate two-way fixed effects models for a global sample of 1,880 observations across 129 countries over this time period to assess the relationship between FDI centrality and military expenditures. We find that degree centrality in the global FDI network has a positive impact on military expenditures, net of other relevant predictors.Military expenditures do not, however, appear to drive FDI. We estimate the aggregate impact of FDI centrality on military expenditures, and suggest that these increased costs amount to a hidden subsidy of global corporate activity.

Spatial Heterogeneity Impacts of Bilateral Foreign Direct Investment on Green Energy Efficiency in China

At present, green energy transformation and climate policy are increasingly connected. The need to improve national competitiveness and implement climate and energy strategies means that an energy-consuming country like China must rapidly enhance its green energy efficiency (GEE) and energy consumption structure. The following paper contributes to the existing literature by analyzing the effects of bilateral FDI on GEE from the perspective of spatial correlation. Based on data from 30 Chinese provinces between 2003 and 2020, this paper uses multiple undesired output indicators covering eight pollutants to measure GEE and then uses the coupling function to measure the coordinated development level of bilateral FDI (CDFDI). According to the Panel Vector Autoregression model, there is a coupling relationship between bilateral FDI. Both the global Moran index and the local Moran scatter plot shows that GEE and CDFDI are characterized by spatial aggregation. This paper adopts the dynamic Spatial Dubin Model for empirical analysis. Our results reveal a significant positive impact of CDFDI on GEE in local and nearby regions. The impact of CDFDI on GEE is moderated by technological diffusion, nationalization, and environmental regulation, resulting in differential impacts on GEE in local and nearby regions. Furthermore, CDFDI with different investment motives has a boosting effect on local GEE. Among them, the mutual investment portfolio between China and developed countries has a negative impact on the local GEE. By contrast, the complementary investment motivation portfolio can boost GEE in local and adjoining regions in any period. This is the first paper to study the spatial effects of green energy efficiency and the heterogeneity of investment incentives to help Chinese international investment policymakers better understand the contribution of CDFDI to improving GEE and inform supportive policies. To improve green energy efficiency, the government must strengthen the implementation of the opening-up policy and create international capital flows suitable for local needs.

Public opinion on U.S. investment in foreign countries: Survey evidence from 11 southern states in the United States

Objective Despite a growing literature on the impact of economic nationalism on public attitudes toward foreign direct investment (FDI) inflows, public attitudes toward U.S. FDI outflows have been overlooked. We examine U.S. residents’ attitudes toward FDI outflows to two host countries viewed unfavorably by the American public, Mexico and China, and the extent to which providing accurate information on FDI flows between the United States and these countries affects the biases toward American investment in these countries. Methods We implemented a vignette experiment on respondents from 11 southern states in the United States. Results We find little support for the existence of bias toward Mexico or China as destinations for American investment, nor do we find that providing accurate information on bilateral FDI flows affects perceptions of U.S. FDI outflows to these countries. Instead, individuals' economic self-interest and sociotropic concerns influence their attitudes toward FDI outflows. Conclusions Individuals' preferences toward U.S. FDI outflows are not shaped by biases toward investment destinations but by their concerns regarding the economic and security consequences of American overseas investment.

Geopolitical Risk and Globalization

In this paper we examine the effect of geopolitical risks on globalization using Pseudo-Poisson Maximum Likelihood (PPML) methodology for gravity trade model. As a measure for globalization, we use bilateral foreign direct investment (FDI) data from 2001 to 2012 and bilateral trade data from 1948 to 2019. Ours is the first paper making use of the recently created geopolitical risk (GPR) dataset using text analysis to test its effect on globalization. For the univariate model, we find a significant decline in FDI by 3.6% and 0.5% in trade for 10% increase in geopolitical riskiness, but for multivariate model we only see a significant increase in trade by 0.04%. We test the robustness of our results by doing more granular analysis by using individual country GPR measures as well as using KOF Globalization Index instead of FDI and Trade flow. Here also we see a significant negative effect of geopolitical risk on globalization.