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Asymmetric Cultural Proximity and Greenfield FDI

Matteo Fiorini, Giorgia Giovannetti (), Mauro Lanati () and Filippo Santi ()
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Mauro Lanati: RSCAS (European University Institute)
Filippo Santi: University of Florence

No 434, Development Working Papers from Centro Studi Luca d'Agliano, University of Milano

Abstract: This paper investigates the role of asymmetric cultural proximity (CP) on greenfield foreign direct investment (FDI). We build a conceptual framework that explicitly accounts for cultural attractiveness as an asymmetric dimension within a broad notion of CP. We revisit the existing supply/origin-side theories of bilateral FDI to derive a gravity equation suited for testing the impact of (i) the attractiveness of destination's culture for citizens in the origin country, and (ii) the attractiveness of origin's culture for individuals in the destination economy. While the role of the former direction of CP is well understood in the literature, we propose new mechanisms to rationalize that of the latter. We use exports and imports of cultural goods to proxy for the two directions of asymmetric and time-dependent CP in the same empirical specification. The econometric analysis confirms a positive role of asymmetric CP as a determinant of Greenfield FDI. Moreover, it suggests a stronger investment effect of the origin's culture attractiveness for the destination country. Finally, it provides support for the mechanisms proposed in the theoretical discussion.

Keywords: Cultural proximity; Greenfield FDI; Cultural trade; Gravity model (search for similar items in EconPapers)
JEL-codes: F14 F21 F23 Z10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2018-01-29, Revised 2018-01-29
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