A micro-macro model of foreign direct investment: knowledge-based gravity forces, self-selection and third-country effects

Henk Kox

MPRA Paper from University Library of Munich, Germany

Abstract: The paper develops a stand-alone and testable gravity model to explain international patterns of foreign direct investment (FDI). The core model is based on knowledge-based gravitational forces that are directly or indirectly linked to a country's economic mass (GDP). The micro-economic part of the model explains the bilateral extensive FDI margin, i.e. the Firms self-select into FDI if their productivity is high enough to overcome the fixed costs of setting up costs a foreign subsidiary, using its proprietary knowledge assets as crystallization kernel. Aggregated at country level, the model explains the occurrence of zero FDI flows between countries. The bilateral part of the model accounts for direct FDI friction costs. The model is generalized to a n-country world by also accounting for the relative FDI friction costs of all countries, quantified via FDI-based multilateral resistance terms. The paper derives testable predictions from the model. The model implications have high potential policy relevance.

Keywords: foreign direct investment; firm behavior; decision model; structural gravity; zero FDI flows; policy implications (search for similar items in EconPapers)
JEL-codes: D21 D23 F23 G32 L1 O33 O34 (search for similar items in EconPapers)
Date: 2022-12-05
New Economics Papers: this item is included in nep-int
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Related works:
Working Paper: A micro-macro model of foreign direct investment: Knowledge-based gravity forces, self-selection and third-country effects (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:115542

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