Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/266494 
Authors: 
Year of Publication: 
2022
Publisher: 
KVL Economic Policy Research, 's-Hertogenbosch
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.
Subjects: 
foreign direct investment
firm behaviour
decision model
structural gravity
zero FDI flows
policy implications
JEL: 
D23
F23
G32
L1
Document Type: 
Working Paper

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