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The investment development path in space

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Abstract

Although spatial hypotheses are not new in the FDI literature, their examination in the dynamic context of the ‘investment development path’ (IDP) provides some new insights. In this paper, we examine proximity to markets at different stages of the IDP as a determinant of a country’s own foreign direct investment (FDI) pattern. Our main contribution lies in the empirical estimation of the importance of spatial determinants for the emergence of inward and outward FDI. Our results support that distance to countries at higher stages up the IDP which are better integrated into the world FDI network, has a negative effect on the probability of transition from any stage of the IDP to the next. The magnitude of the impact is generally increasing in the stage of the surrounding markets.

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Notes

  1. Looking at the determinants of US foreign affiliate sales in levels, Carr et al. (2001) and Markusen and Maskus (2002) estimate a distance parameter of −1.5. It is however noteworthy that in a standard ‘proximity-concentration’ framework the impact of distance on FDI flows should be positive. Because of the trade-substituting role of horizontal FDI, as well as the established association of distance with trade costs (see Bergstrand 1985), distance is expected to reduce trade flows and strengthen the incentive for investment. The opposite empirical evidence could be seen as an indication for vertical instead of horizontal multinational activity. Alternatively, it could indicate that foreign plant set-up costs are positively correlated with distance so that a negative distance parameter could also arise in the case of horizontal multinationals (Markusen and Venables 2000).

  2. The data set and full set of graphs for the 187 countries of the analysis is available upon request.

  3. Using geographical latitudes and longitudes of any two points on the surface of the earth we can calculate air-distance as the spherical angular difference \(\Updelta\hat{\sigma}\) between them multiplied by the radius R of the earth. Let \(\phi_{i}, \lambda_{i}\); \(\phi_{j}, \lambda_{j}\) be the geographical latitude and longitude of two points (a base ‘standpoint’ i and the destination ‘forepoint’ j), respectively, and \(\Updelta\phi, \Updelta\lambda\) their differences. \(\Updelta\hat{\sigma}\), that is the angular difference, or central angle can be constituted from the spherical law of cosines: \(\Updelta\hat{\sigma}=\arccos\left(\cos\phi_{i} \cos\phi_{j}\cos\Updelta\lambda+\sin\phi_{i}\sin\phi_{j}\right).\)

  4. http://stats.unctad.org/FDI.

  5. http://www.ers.usda.gov/Data/Macroeconomics/ According to the documentation attached ‘The GDP series starts with the 2000 US dollar GDP series in the latest edition of the World Bank’s World Development Indicators and is filled in using other data sources such as Oxford Economic Forecasting, Global Insight, Project Link, and the International Monetary Fund’s International Financial Statistics. Conversion to dollars is based on a fixed 2000 exchange rate. Further gaps in all of the data series are filled in by a process of interpolation, extrapolation, or back estimation’.

  6. Columbia Journalism Review http://backissues.cjrarchives.org/resources/inflater.asp.

  7. Robert Sahr (Robert.Sahr@orst.edu).

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Acknowledgments

I wish to thank Donald Wright and Mark Melatos for detailed comments to earlier drafts, as well as participants at the Barcelona IGU Conference 2008 for helpful suggestions. I would also like to thank one anonymous referee for many valuable suggestions on the manuscript.

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  1. OECD Statistics Directorate, 2 rue André Pascal, 75775, Paris cedex 16, France

    Alexandros Ragoussis

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  1. Alexandros Ragoussis
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Correspondence to Alexandros Ragoussis.

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The views and opinions expressed in this paper do not represent the views of the OECD nor of its member countries.

Appendix

Appendix

Data on FDI flows were obtained from the online database of the United Nations Conference on Trade and Development (UNCTAD) Footnote 4. The data set covers 196 economies of the world and provides yearly data on inward and outward FDI flows from 1970 to 2006, in US dollars at 2007 prices. Data on GDP were retrieved from the International Macroeconomic Data Set of the United States Department of Agriculture (USDA) Footnote 5 which provides data for real (adjusted for inflation) GDP, population, real exchange rates, and other variables for 190 countries. The data set covers the period from 1969 to 2006 and data projected to 2017. We used an online conversion calculator Footnote 6 created in conjunction with the Oregon State University Political Science Department Footnote 7, to adjust the series to 2007 prices.

The two data sets for FDI and GDP overlap for 187 countries and 37 years (1970–2006) which will be the focus of our analysis. The sample for our analysis consists of 187 countries traced for 37 years; in total 6,919 units of observation. In 1,031 out of these observations, one (or both) values of inward or outward flows is missing from the data. In each of these cases, if there was consistent evidence from years close to the missing observations then the observations were classified by interpolation according to that evidence. Otherwise the observations were classified as ‘inconclusive’. 546 of the total observations were excluded from the analysis because of political regimes non-compatible with investment activities, regardless of whether or not observations were missing. The remaining 6,373 observations are used in the empirical analysis undertaken.

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Ragoussis, A. The investment development path in space. Rev World Econ 147, 527–541 (2011). https://doi.org/10.1007/s10290-011-0089-7

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