Empirical Economics

, Volume 50, Issue 1, pp 197–229 | Cite as

Foreign direct investment, trade integration and the home bias: evidence from the European Union

  • Valeriano Martínez-San Román
  • Marta Bengoa
  • Blanca Sánchez-Robles
Article

Abstract

This paper combines two fields in the economic literature by examining empirically the pattern of foreign direct investment (FDI) flows within the European Union (EU) and the relevance of trade integration as an influence upon investment flows over the period 1995–2009. We capture trade integration primarily by means of the home bias, rather than by using other indicators such as tariffs and non-tariff barriers. In turn, the home bias is computed for the countries in our sample by a standard gravity model. Our results find a positive and robust correlation between trade integration and FDI activity for the countries in our sample. For the particular case of the EU, it is not possible to strictly discriminate between horizontal or vertical FDI. FDI flows seem to be more consistent with a knowledge-capital hybrid model, where considerations about the market size of the partners and their relative endowment of skilled labour are relevant.

Keywords

International trade FDI Gravity model Home bias European Union Knowledge capital 

JEL Classification

F10 F14 F15 F21 

Notes

Acknowledgments

We would like to thank an anonymous referee. We have benefited from comments and suggestions from Farid Toubal, Inmaculada Martinez-Zarzoso, Gabriel Felbermayr, Maite Alguacil and the participants to the CESifo Conference on Gravity Models of Bilateral Trade, the Arnoldshain Seminar 2014 and the 3rd Meeting on International Economics at University of Valencia and Jaume I. We are also grateful to the faculty at the Department of Economics and Business at CCNY for their suggestions during the seminar presentation of a previous version of this work. All errors are our own.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  • Valeriano Martínez-San Román
    • 1
  • Marta Bengoa
    • 2
  • Blanca Sánchez-Robles
    • 1
  1. 1.Department of EconomicsUniversity of CantabriaSantanderSpain
  2. 2.Colin Powell SchoolCity University of New York at City CollegeNew YorkUSA

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