Working Paper Series no. 153: Revisiting the proximity-concentration trade-off: Distance and Horizontal Foreign Direct Investment in OECD countries

Abstract

This paper provides new insights in the link between distance and Foreign Direct Investment (FDI) in OECD countries. We find that the impact of distance on flows and stocks of FDI, controlling for exports, is negative and strongly significant, in line with gravity models, whereas in a standard proximity-concentration framework the impact should be positive. We propose a harmonized theoretical framework, allowing for distance increasing fixed costs, to reconcile these conflicting conclusions. This model is tested using alternative measures of distance (geographical/monetary/financial/legal/cultural) on OECD countries (1997-2001) and the impact of cultural distance appears strongly predominant in this setup.

Delphine Irac
August 2006

Classification JEL : F02, F15, F2

Keywords: foreign direct investment, proximity-concentration trade-off, distance, gravity models, cultural variables, fixed costs