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

Valeriano Martinez-San Roman, Marta Bengoa () and Blanca Sanchez-Robles

Empirical Economics, 2016, vol. 50, issue 1, 197-229

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. Copyright Springer-Verlag Berlin Heidelberg 2016

Keywords: International trade; FDI; Gravity model; Home bias; European Union; Knowledge capital; F10; F14; F15; F21 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (21)

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DOI: 10.1007/s00181-015-0942-y

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