Determinants of Foreign Direct Investment: A Comparative Analysis of Distance Factors

Purpose: This study aims to evaluate the role of the CAGE (Cultural, Administrative, Geographical, and Economic) distance dimensions in attracting bilateral inward Foreign Direct Investments to four sub-regions of Asia (East Asia, Southeast Asia, South Asia, and West Asia/Middle East) from OECD developed markets.
Design/Methodology/Approach: The analysis employs a panel data framework that includes bilateral FDI flows from 8 major OECD investor countries to 17 non-OECD Asian countries, alongside 12 OECD host countries from 2013 to 2019. The estimation techniques used are Pseudo-Poisson Maximum Likelihood (PPML) Estimation and Ordinary Least Squares (OLS) regression.
Findings: The full sample analysis indicates that developed nations tend to invest more in countries that are administratively, geographically, and economically closer. Multiple distance dimensions exert a negative influence on bilateral inward Foreign Direct Investments between country pairs, with developing nations being more susceptible to the negative impact of these distance factors compared to developed countries. Comparative analysis reveals that South Asia and Southeast Asia are predominantly impacted by these distance factors. Furthermore, the results underscore the need to consider structural disparities at the sub-regional level within Asia.
Originality: This study integrates the CAGE framework with the structural gravity approach, offering a systematic evaluation of the heterogeneities among Asian subregions in their ability to attract bilateral inward Foreign Direct Investments. It contributes to a nuanced understanding of how distance dimensions impact Foreign Direct Investments, particularly in the context of developing economies in Asias.