The impact of geographical location and linguistic proximity on bilateral FDI developing economies

This study examines the role of geographical location and linguistic proximity incorporated with traditional macroeconomic determinants in explaining the direction and volume of bilateral FDI (Foreign Direct Investments) ows from six major world economies (members of G-7) to a number of developing economies in Asia, Latin America and Central and Eastern Europe (CEE). Using a recently compiled panel data set based on OECD, WDI and UNCTAD databases and extended gravity model, the study investigates whether and how these determinants dier for both industrialized and developing economies over a period from 1992 to 2012. The results reveal a decline of the volume of investments with increasing geographical and linguistic distance between the most populated cities in two countries. Gross domestic product proves to be positive and statistically signicant in attracting investors. Interestingly, the results also verify the absence of sucient dierences in how explanatory variables aect the three developing markets. Nevertheless the results are statistically fragile due to the lack of available data and the scale eect in the studied sample.