Revisiting the distance elasticity and investment motives in the FDI gravity model: Aggregate vs. sector-level evidence

Nicola Rebmann and Konstantin Wacker

No 268, wiiw Working Papers from The Vienna Institute for International Economic Studies, wiiw

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. The latter reflects that distance potentially captures more complex sector-specific components than are captured in the current gravity model for FDI.

Keywords: Gravity model; foreign direct investment; sector heterogeneity (search for similar items in EconPapers)
JEL-codes: F21 F23 (search for similar items in EconPapers)
Pages: 71 pages including 26 Tables and 8 Figures
Date: 2025-09
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