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

Henk Kox

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

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. 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 behaviour; decision model; structural gravity; zero FDI flows; policy implications (search for similar items in EconPapers)
JEL-codes: D23 F23 G32 L1 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-int
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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:zbw:esprep:266494

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