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SPATIAL INTERDEPENDENCIES OF FDI LOCATIONS: A LESSENING OF THE TYRANNY OF DISTANCE?

Stephen G. Hall
Leicester University, NIESR and Bank of Greece

Pavlos Petroulas
Bank of Greece

ABSTRACT

Recent theoretical approaches stress the importance of complex integration strategies of multinationals and the interdependence between locations. Up till now little has been done to incorporate the potential cross-country dependencies into the empirical analysis of the determinants and the structure of foreign direct investment. By utilizing a panel data set that consists of real FDI stocks for 476 country pairs for the years 1994-2004 and a distance weighted spatial matrix, we find significant third country effects. Interestingly, the bilateral variables seem to be in concordance with the notion of horizontally motivated FDI while the spatial third country effects seem to comply with the notion of vertical FDI and production fragmentation. While bilateral variables seem to dominate location decisions the results confirm the existence and importance of international interdependence.

Keywords: Foreign Direct Investment, Spatial Econometrics, Panel Data

JEL classification: F21; F23; C31; C33

Acknowledgements: We are grateful to Heather D. Gibson and other Bank of Greece’s workshop participants for useful and insightful comments and suggestions. To Costas Petsounis of Mentor Hellas for the modification to Elhorst’s matlab code, so that it runs with missing values and to Ingmar C. Prucha and J. Paul Elhorst for their prompt replies to our inquires. The views, opinions and analysis of this paper are those of the authors and do not necessarily coincide with those of either the Bank of Greece or the Eurosystem. All remaining errors are our own.

Correspondence:

Pavlos Petroulas,
Economic Research Department,
Bank of Greece, 21 El. Venizelou St.,
102 50 Athens, Greece,
Tel. +30210-320 2643
Email: ppetroulas@bankofgreece.gr


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