FDI, gravity, and aggregation: revisiting the distance elasticity with sector-level FDI data

Konstantin M. Wacker and Nicola Rebmann

No 3245, Working Paper Series from European Central Bank

Abstract: This paper re-examines foreign direct investment motives in the ‘FDI gravity’ model (Kleinert and Toubal, 2010), focusing on the role of distance. More precisely, we investigate whether aggregate and pooled gravity models for FDI obscure relevant heterogeneities across sectors. This is possible through the novel MREID dataset, which provides us with FDI data at the 2-digit NAICS level for 184 countries over the period 2010 to 2020. Our results reveal that aggregate and pooled models mask significant sector heterogeneities in two aspects: (i) in the importance of horizontal versus vertical FDI motives, and (ii) in the distance elasticity. Distance is negatively correlated with FDI on an aggregate level, which is robust to multiple econometric specifications, but exhibits significant sector heterogeneity. Our analysis suggests the presence of complex sector-specific components that cannot easily be explained with standard economic rationales. JEL Classification: F21, F23, C33

Keywords: foreign direct investment; gravity model; sector heterogeneity (search for similar items in EconPapers)
Date: 2026-06
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263245

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